Question

If the economy has a contractionary gap, the government can eliminate that gap by applying higher income tax rates.
A. True
B. False

In the short run fluctuations in _____ will lead to fluctuations in ____. Thus, during that short-runperiod, government policies that influence ______________ may help to eliminate _______ gaps.

Answer 1

True

When there is a contractionary gap then unemployment rate is very high. The government can introduce new fiscal policy in that the government can change tax rate and change the expenditures as well.

Spending, Output, Aggregate Planning, Output

So the correct statement will be

In the short run fluctuations in Spending will lead to fluctuations in output. Thus, during that short-run period, government policies that influence aggregate planning may help to eliminate output gaps.