1. Which of the following would help a government reduce an inflationary output gap? LO1

a. Raising taxes.

b. Lowering taxes.

c. Increasing government spending.

d. Decreasing government spending.

2. The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand but also at the same time raising taxes to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is: LO1

a. The worst possible combination of tax and expenditure changes.

b. The best possible combination of tax and expenditure changes.

c. A mediocre and contradictory combination of tax and expenditure changes.

d. None of the above.

After selecting your responses to both questionsexplain your answers in detail, use economic terms(aggregate-spending, production, income, employment...What are the economic consequences, how would they influence the four major sectors (C+I+G+Xn) and Real GDP.