Question

An increase in government purchases, a decrease in net taxes, or some combination of the two is designed to: Select one: a. close a recessionary gap b. reduce unemployment c. shift the economy's aggregate demand curve outward d. all of the above

Answer 1

Both increase in government spending and decrease in taxes (or there combination) will shift IS curve to the right which will result in Aggregate demand(AD) curve to shift outward. Recessionary gap occurs when aggregate equilibrium output is less than potential output and in order to close that we have to increase equilibrium output. This rightward shift in AD curve will result in increase in output and thus they can be designed to reduce recessionary gap. As discussed above they result in AD curve to shift outward which will. result in increase in output. As output increases, economy have to hire more labor and thus unemployment decrease. So, They can be used to reduce unemployment. Thus all of the above are correct.

Hence, the correct answer is (d) all of the above.