Question

1. The government engages in expansionary fiscal policy in order to close a recessionary output gap....

1. The government engages in expansionary fiscal policy in order to close a recessionary output gap. In the long-run we would expect to witness

A. Consumption, Investment and Net-exports fall by the amount government expenditure increased by.

B. Price levels to fall.

C. Taxes to fall in the future.

D. Consumption, Investment and Net-exports rise by the amount government expenditure decreased by.

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Answer #1

Option C

  • When the government engages in expansionary fiscal policy inorder to close a recessionary output gap, we would expect to witness taxes to fall in the future.
  • During any economic crisis like the recession, the expansionary fiscal policy leads to national debt and also causes budget deficit.
  • To close the recessionary output gap the government uses expansionary fiscal policy.
  • This policy will increase the government spending.
  • And at the same time, the taxes will fall.
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