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?
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.
Get Answers For Free
Most questions answered within 1 hours.