ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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raise taxes by more than $200 billion
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raise taxes by less than $200
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lower taxes by $200 billion
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decrease the budget deficit
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Detailed explanation-1: -According to Keynesian economics, increased government spending raises aggregate demand and increases consumption, which leads to increased production and faster recovery from recessions.
Detailed explanation-2: -If an increase in government spending, financed by borrowing, crowded out an equal amount of private spending, which of the following would result? Aggregate demand would remain unchanged.
Detailed explanation-3: -The current real GDP must be higher than the potential GDP for the gap to be considered inflationary. Policies that reduce an inflationary gap include reductions in government spending, tax increases, bond and securities issues, interest rate increases, and transfer payment reductions.
Detailed explanation-4: -To reduce the inflationary output gap, the government uses a contractionary fiscal policy. This policy aims to reduce the gap between actual output level and potential output level. Thus, the government can raise the taxes and reduce their spending level.