Question

1. assume an economy is experiencing a recessionary expenditure gap. a. what fiscal policy action(s) could potentially close the gap? be specific and explain its impact in the ad-as model. b. what monetary policy action(s) could potentially close the gap? be specific and explain its impact in the ad-as model. c. would you recommend any of the above actions? why or why not?

Answer 1

Expansionary fiscal policy, involving increased government spending or decreased taxes, is appropriate to address a recessionary gap in the AD-AS model.

Step-by-step explanation:

In response to a recessionary gap, expansionary fiscal policy would be most appropriate. This involves increasing government spending or decreasing taxes to stimulate aggregate demand and close the gap.

In the AD-AS model, expansionary fiscal policy would shift the aggregate expenditure schedule (AE) upward, resulting in an increase in output and employment. This would move the economy from the initial equilibrium point to a new equilibrium point at potential GDP.

I would recommend expansionary fiscal policy in response to a recessionary gap because it can effectively stimulate the economy and address the gap. By increasing government spending or decreasing taxes, it encourages consumer spending and investment, which helps to boost aggregate demand.