Which of the following actions could be undertaken if the government wants to close a recessionary gap?
A)Increase taxes and reduce government spending.
B)Reduce taxes and increase government spending.
C)Increase taxes and increase government spending.
D)Reduce taxes and reduce government spending.

Question

Quizplus · Accepted Answer

In the case of a recessionary gap, the economy is operating below its potential, and there is a contraction in aggregate demand. To close this gap, the government needs to stimulate demand. The most effective way to do this is by increasing government spending and/or reducing taxes, as this will increase aggregate demand by increasing disposable income and overall spending. Therefore, option B is the best choice.

Option A, increasing taxes and reducing government spending would lead to a further contraction of the economy, worsening the recession. Option C, increasing taxes and increasing government spending, would not result in any significant increase in aggregate demand, as the rise in taxes would offset the increase in spending. Option D, reducing taxes and reducing government spending, would have a limited impact on demand as the reduction in spending would offset the tax reductions.

Which of the Following Actions Could Be Undertaken If the Government