Question

To close a recessionary gap with discretionary fiscal policy, the government would__________taxes, and the______________curve would shift to the _________.

Select one:

a. increase, supply, left

b. decrease, supply, right

c. decrease, demand, right

Answer 1

Whenever a recessionary gap takes place, the core because of it is the fact that the overall demand in the economy for goods and services is low. This leads to producers also making a loss as well as general price levels being low and unemployment rising.

The fiscal policy of the government is a method through which government regulates its spending and/or taxes to regulate the flow of money int he economy. This helps in creating demand and making sure that the effects can be reversed.

Accordingly, we look at the given questions.

A) An increase in the taxes would further reduce the flow of money in the economy and make it even more difficult for buyers to purchase. The idea is to put money in the hands of the consumer not take away from it therefore this option is false.

B) Even though, the government does reduce the taxes charged, it does not shift the supply curve rightward but it merely increases the supply due to a push in the demand. The supply curve shifts to the right, increasing supply only when new technology comes into play that raises the total supply therefore this option is false

C) The decrease indeed is done so as to ensure that the demand increases and that the recession which has taken place due to the fall in demand can be corrected. As taxes decrease, the availability of capital for purchases increases and they are able to purchase more in the markets. This option is true

Please feel free to ask your doubts in the comments section.