In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should:

A. increase tax rates and/or reduce government spending.

B. discourage personal saving by reducing the interest rate on government bonds

C. increase government expenditures.

D. encourage private investment by reducing corporate income taxes.

Question

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3 March, 10:56

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should:

A. increase tax rates and/or reduce government spending.

B. discourage personal saving by reducing the interest rate on government bonds

C. increase government expenditures.

D. encourage private investment by reducing corporate income taxes.

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Answers (1)

Know the Answer?

Nikita · Answer 1

The correct answer is A. increase tax rates and/or reduce government spending.

Explanation:

Increasing the tax burden is an easy way for the state to increase its income temporarily and subject matter, but it turns out that increasing the tax burden affects productivity and consumption, so in the end the income of the productive sector is diminished, and more taxes on a lower taxable base does not imply increasing revenues.

When a government decides to reduce public spending for a fiscal balance, it is limited to reducing the social assistance and social security, but not to reduce the bureaucratic apparatus that curiously is usually high in countries with economic crisis, and also Be a source of corruption corruption.