Final answer:
To counter a recessionary gap, the most suitable fiscal policy is expansionary fiscal policy, which involves either decreasing taxes or increasing government spending to boost aggregate demand and stimulate the economy.
Step-by-step explanation:
The appropriate fiscal policy to counter a recessionary gap is an expansionary fiscal policy. This policy aims to increase the level of aggregate demand through either a reduction in taxes or an increase in government spending. During a recession, the economy is producing below its potential GDP, which means there is insufficient demand to purchase what the economy is capable of producing, leading to unemployment and idle resources.
Applying an expansionary fiscal policy will help bridge the gap between the actual and potential GDP by boosting consumption and investment within the economy, leading to increased production and employment. The aggregate demand curve would shift to the right in the aggregate demand and aggregate supply model, reducing the recessionary gap. This approach directly contrasts with contractionary fiscal policy, which involves increasing taxes and cutting government spending, and is used to cool down an overheating economy that is above its potential GDP.