Question

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net exports = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here? rev: 06_13_2018 Multiple Choice An increase in government purchases and taxes A decrease in government purchases and taxes A decrease in government purchases and an increase in taxes An increase in government purchases and a decrease in taxes

Answer 1

Answer:

A decrease in government purchases and an increase in taxes.

Explanation:

Fiscal policy refers to the use of the government budget to affect the economy. This includes government spending and levied taxes. The policy is said to be expansionary when the government spends more on budget items such as infrastructure or when taxes are lowered. Such policies are typically used to boost productivity and the economy.

Conversely, the policy is contractionary when government spending decreases or taxes rise. Contractionary policies might be used to combat rising inflation. Generally, expansionary policy leads to higher budget deficits, and contractionary policy reduces deficits.