Final answer:
To manage a positive GDP gap with ensuing inflation, the government needs to decrease AD, usually by reducing spending or raising taxes. Conversely, to address a negative GDP gap, indicative of a recession, the government should increase AD through higher spending or tax cuts. These policy actions aim to bring the economy's output back to its potential GDP.
Step-by-step explanation:
When addressing the economic issue of a positive or negative GDP gap, certain actions are necessary to adjust aggregate demand (AD). A positive GDP gap occurs when actual GDP exceeds the potential GDP, leading to inflation due to excess demand. In this case, there's an inflationary gap, and to manage this, the government has to implement policies such as reducing government spending or increasing taxes to decrease AD and control inflation.
On the other hand, a negative GDP gap is when actual GDP is below the potential GDP, indicating a recessionary environment with higher unemployment. The key measure here is for the government to foster economic growth by increasing government spending or cutting taxes, causing a rightward shift in AD. This is expected to close the recessionary gap by increasing economic activity up to the level of potential output.
Furthermore, other factors such as increased business investment, changes in interest rates, and demands for imports and exports can also cause shifts in AD, thus affecting the GDP gap. Monitoring these economic indicators allows the government and monetary authorities to apply the correct fiscal and monetary policies to steer the economy towards its potential GDP.