Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward

Question

Multiple Choice
an equality of tax receipts and government expenditures.
an excess of tax receipts over government expenditures.
an excess of government expenditures over tax receipts.
a reduction of subsidies and transfer payments and an increase in tax rates.

Answer 1

If the economy is at full employment and investment spending declines dramatically, it can lead to a decrease in aggregate demand, potentially causing a recession. To restore full employment, government fiscal policy should aim to stimulate demand.

In this case, the correct choice would be:

an excess of government expenditures over tax receipts.

This option suggests that the government would increase spending (through stimulus measures, public projects, or other forms of expenditure) relative to its tax revenue, which would help to stimulate the economy and restore full employment.