Question

If the U.S. government manages to close a recessionary gap and achieve potential GDP with fiscal...

If the U.S. government manages to close a recessionary gap and achieve potential GDP with fiscal policy, would we expect inflation or deflation to occur?

Homework Answers

Answer #1

Answer - When the government will make efforts to close the recessionary gap , it will increase the money supply in the economy through the tools like government spending , tax cuts etc. By this the demand will be increased and potential GDP would be achieved.

It will increase the demand through the increased money supply , thus after reaching the potential GDP , the inflationary conditions will begin in the economy when the GDP will cross the potential GDP. This can be called as the after effect of the increased money supply.

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