If the economy is experiencing a recessionary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should
A) reduce aggregate demand by cutting government spending or raising taxes.
B) increase aggregate demand by increasing government spending or cutting taxes.
C) increase aggregate supply by cutting government spending or raising taxes.
D) increase aggregate supply by increasing government spending or lowering taxes.

Question

Quizplus · Accepted Answer

During a recessionary gap, there is a decline in aggregate demand, which results in a decline in output and employment. To accelerate the adjustment to long-run equilibrium, the government should adopt expansionary fiscal policies that increase aggregate demand. Option B is the correct choice as it suggests an increase in government spending or cutting taxes, which leads to an increase in disposable income, leading to higher consumption and investment levels. These will boost aggregate demand, leading to an increase in output and employment levels. The other options will likely reduce aggregate demand further and hamper the economic recovery.

If the Economy Is Experiencing a Recessionary Gap and the Government