d))All of the above 25) In the short run, if the economy has a recessionary gap,

Question

d))All of the above 25) In the short run, if the economy has a recessionary gap, an increased government budget deficit resulting from higher government spending or lower taxes is most likely to a) have no effect on aggregate demand or real GDP after direct and indirect offsets are counted b) increase aggregate demand, which will move the economy toward full employment real c) increase aggregate demand, raising prices and creating an inflationary gap d) decrease aggregate demand, reducing prices and increasing the recessionary gap GDP

Explanation / Answer

Ans: Increase aggregate demand, which will move the economy towards full employment real GDP

Explanation:

Increase in government spending will have a multiplier effect on the private spending leading to increase in aggregate demand. Again a reduction in tax rate will also lead to increase in disposable income of the people which will also lead to increase in aggregate demand. This increase in aggregate demand will move the economy towards full employment real GDP.

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