Suppose the economy is in an equilibrium in which real GDP is less than potential GDP.To increase real GDP,the government can use a fiscal stimulus of
A)increasing taxes only.
B)decreasing government expenditure only.
C)decreasing taxes and/or increasing government expenditure.
D)decreasing government expenditure and simultaneously increasing taxes.
E)increasing the quantity of money.

Question

Quizplus · Accepted Answer

To increase real GDP when the economy is operating below potential, the government can use a fiscal stimulus which involves either decreasing taxes and/or increasing government expenditure. Decreasing taxes would increase disposable income, resulting in an increase in consumption expenditure and aggregate demand in the economy. Similarly, an increase in government expenditure would lead to an increase in aggregate demand through increased government purchases of goods and services, which would then stimulate private investment and consumer spending. Thus, decreasing taxes and/or increasing government expenditure would increase the level of aggregate demand, leading to an increase in real GDP.

Suppose the Economy Is in an Equilibrium in Which Real