Statement 1: A tax cut will have the same impact on the recessionary gap as an increase in \(\mathrm{G}\) only if people spend the entire tax cut. (LO1) Statement 2: The paradox of thrift is more relevant today, when savings are so low, than it was back in the \(1950 \mathrm{~s}\) and \(1960 \mathrm{~s}\). a) Statement 1 is true and statement 2 is false. b) Statement 2 is true and statement 1 is false. c) Both statements are true. d) Both statements are false.

Statement 1 says that a tax cut will have the same impact on the recessionary gap as an increase in government spending (G) only if people spend the entire tax cut. To analyze this statement, let's remember that a recessionary gap occurs when the real GDP is lower than its potential level, leading to unemployment and underutilized resources. Both fiscal policies (tax cuts and increasing government spending) are used to close this gap by stimulating demand, which in turn increases output and employment. If people spend the entire tax cut, then the amount of the tax cut will be directly injected back into the economy, leading to increased demand and output, similar to an increase in government spending. If people do not spend the entire tax cut, some of the money will be saved, leading to a smaller increase in demand and output than an equal increase in government spending would have generated. Thus, Statement 1 is true.

Statement 2 claims that the paradox of thrift is more relevant today, when savings are low, than it was back in the 1950s and 1960s. The paradox of thrift states that when individuals collectively try to increase their savings during an economic downturn, it can lead to a decrease in aggregate demand, which worsens the recession by further reducing income and employment. The statement suggests that the paradox is more relevant today because savings rates are currently low. However, the paradox of thrift is typically more relevant when savings rates are high, as this indicates that individuals are saving more (and thus spending less), which depresses aggregate demand and amplifies economic downturns. Therefore, Statement 2 is false.

Based on our analysis of both statements, we have concluded that Statement 1 is true, and Statement 2 is false. Using this information, we can now identify the correct answer from the multiple-choice options provided: a) Statement 1 is true and statement 2 is false. (Correct) b) Statement 2 is true and statement 1 is false. c) Both statements are true. d) Both statements are false. Hence, the correct answer is (a) Statement 1 is true and statement 2 is false.