To address a recessionary gap, where the economy is operating below its potential output, the government can take specific actions to stimulate demand and increase economic activity. One effective approach is to increase government expenditures on goods and services.
Increasing government spending directly injects money into the economy, leading to higher demand for goods and services, which can create jobs and drive economic growth. When the government purchases more goods and services, it contributes to the overall demand in the economy.
In addition to increasing government spending, decreasing taxes can also play a significant role in eliminating a recessionary gap. Lowering taxes puts more disposable income into the hands of consumers and businesses, which can encourage spending and investment. When individuals have more money available, they are likely to buy more goods and services, further boosting demand.
Therefore, the most effective combination to eliminate a recessionary gap is:
- Increase government expenditures
- Decrease taxes
From the options provided, the correct answer is c) decrease taxes and increase government expenditures.