Question

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 discretionary fiscal policy of A. decreasing taxes​ and/or increasing government expenditures. B. decreasing government expenditures and simultaneously increasing taxes. C. increasing the quantity of money. D. decreasing government expenditures only. E. increasing taxes only.

Answer 1

The government will use discretionary fiscal policy of Decreasing taxes and increasing government expenditure.

A. decreasing taxes​ and/or increasing government expenditures.

Explanation:

Inflationary gap occurs when the demand and supply is more than the production of the products due to several factors like, increase in government expenditure, higher level of employment.

Therefore, the gap between the demand and supply and the production leads to inflationary gap. Hence, to increase the real GDP, the government can use a discretionary fiscal policy by decreasing taxes and increasing government expenditure.