Question

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

Answer 1

Answer:

Increasing government spending and decreasing taxes.

Explanation:

Given that,

consumption = $400 billion

Investment = $40 billion

Government purchases = $90 billion

Net export = $25 billion

Full employment level of GDP = $600 billion

Actual GDP:

= consumption + Investment + Government purchases + Net export

= $400 billion + $40 billion + $90 billion + $25 billion

= $555 billion

The actual GDP is lower than the full employment level of GDP, therefore, there is a recessionary gap in the economy.

In this situation, the government uses the expansionary fiscal policy by increasing government spending and decreasing taxes.