Question

Use an aggregate supply-aggregate demand graph to illustrate the effects on real GDP and the price level of a fiscal stimulus when the economy is in recession (be precise in labeling the axes and curves).

Answer 1

Let the AD before fiscal stimuls be AD1

Because the economy is in a recession, to increase growth, the government will use fiscal measures like reduction of taxes or Increase in government consumption.

This fiscal stimulus will shift the AD1 curve to AD2. this will increase the price level from P1 to P2, and real GDP from Y1 to Y2. This will mitigate the recession.

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