Question

Suppose that we are currently in a period of recession and there is a recessionary gap of $10 billion. What kind of policy
should the Congress use? What kind of policy should the Fed use? What might happen if both Congress and the Fed uses
the policies at the same time without consulation with one another?

Answer 1

If the market is at a recessionary gap in the market the government has to undertake a expansionary fiscal policy that involves, lower taxes and higher expenditure in the market,

The Fed will undertake expansionary monetary policy that is higher money supply and lower interest rate in the market. if both steps are taken without consultation from each other then there will be inflationary gap in the market and demand will be more than the economy can supply.