What is the short-run effect of increased deficit spending on an economy experiencing a recessionary gap?
A) Aggregate demand increases, and the gap closes.
B) Aggregate supply increases, closing the gap.
C) Aggregate demand decreases, and the gap widens.
D) Aggregate demand will increase, creating an inflationary gap.

Question

Quizplus · Accepted Answer

Increased deficit spending will lead to an increase in government expenditure and therefore an increase in aggregate demand. This increase in aggregate demand will lead to an increase in output and employment, ultimately closing the recessionary gap.

What Is the Short-Run Effect of Increased Deficit Spending on an Economy