The figure above shows a nation's aggregate demand curve,aggregate supply curve,and potential GDP.
-In the figure above,the ________ gap is one trillion dollars.To close the gap,the government can ________ government expenditure and/or ________ taxes.
A)recessionary;increase;decrease
B)inflationary;decrease;increase
C)inflationary;increase;increase
D)recessionary;decrease;decrease
E)recessionary;decrease;increase

Question

The figure above shows a nation's aggregate demand curve,aggregate supply curve,and potential GDP.
-In the figure above,the ________ gap is one trillion dollars.To close the gap,the government can ________ government expenditure and/or ________ taxes.
A)recessionary;increase;decrease 
B)inflationary;decrease;increase 
C)inflationary;increase;increase 
D)recessionary;decrease;decrease 
E)recessionary;decrease;increase

Quizplus · Accepted Answer

The recessionary gap is the difference between potential GDP and actual GDP, which in this case is $1 trillion. To close the gap, the government should increase its expenditure and/or decrease taxes, as this will shift the aggregate demand curve to the right, increasing demand for goods and services, and eventually bridging the gap between potential and actual GDP. Therefore, option A is correct. Option B is incorrect because it suggests decreasing government expenditure, which is counterintuitive when trying to close a recessionary gap. Option C is incorrect because increasing both government expenditure and taxes would be inflationary, rather than recessionary. Option D is incorrect because decreasing both government expenditure and taxes would worsen the recessionary situation by decreasing demand for goods and services. Option E is incorrect because decreasing expenditure and increasing taxes has the same effect as option D.

The Figure Above Shows a Nation's Aggregate Demand Curve,aggregate Supply