Question

How can the federal government use discretionary fiscal policy to stimulate the​ economy? An economy is experiencing a recessionary gap. The government can​ ______.

Answer 1

The government can increase spending or decrease taxes.

Step-by-step explanation:

In order to correct recessionary gap, the government can adopt expansionary fiscal policy. The government can increase spending, it will increase production, employment and aggregate income.

The other tool that the government can use is taxes. The government can decrease the tax rates. This will cause the disposable income of the consumers to increase. This will further cause the consumer spending to increase. As a result, production, employment, and aggregate demand will increase.