Consider the U.S. aggregate economy, which is currently operating below its pote

Question

Consider the U.S. aggregate economy, which is currently operating below its potential. Although the unemployment rate has been slowly declining, it is still well above the target rate of about 5%; the labor fprce participation rate of 63.6% is continuing to decline; and industrial capacity utilization is 77.8%, which is 2.5% below its long-run average. (A) In this context, describe how an increase in goverment expenditures on goods and services would stimulate the aggregate economy? (B) Also in this context, describe how a decrease in personal income taxes would stimulate the aggregate economy?

Explanation / Answer

(a)An increase in government expenditure would rise the aggregate demand of the economy which increases the income of economy, b) the decrease in personnel income taxes would increase the personnel disposable income which increases the aggregate demand of economy and thus there is increase in income

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