Question

What are the options available under fiscal policy if we are in an expansionary gap? Which...

What are the options available under fiscal policy if we are in an expansionary gap? Which is more effective? Why?

Homework Answers

Answer #1

If the economy is in expansionary gap then the aggregate demand is more than the potential output. To control the output and price rise in the market, the government will have to increase the taxes and reduce the government purchases in the market.

Reduction in the government purchases will be more effective because government purchases is part of the aggregate demand and fall in purchases will shift the AD curve to the left and bring the ecoomy back to the equilibrium.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
What is expansionary fiscal policy? What gap is the economy experiencing when expansionary fiscal policy is...
What is expansionary fiscal policy? What gap is the economy experiencing when expansionary fiscal policy is used? What is contractionary fiscal policy? What gap is the economy experiencing when contractionary fiscal policy is used? What type of fiscal policy (expansionary or contractionary) do you think the President and Congress are currently enacting? Explain your reasoning.
In your opinion, which policy, the expansionary fiscal policy, or the expansionary monetary policy, will be...
In your opinion, which policy, the expansionary fiscal policy, or the expansionary monetary policy, will be more effective to recover the U.S. economy from the current downturn by COVID-19 pandemic? Why? Please state your answer in the language of economics.
1. The government engages in expansionary fiscal policy in order to close a recessionary output gap....
1. The government engages in expansionary fiscal policy in order to close a recessionary output gap. In the long-run we would expect to witness A. Consumption, Investment and Net-exports fall by the amount government expenditure increased by. B. Price levels to fall. C. Taxes to fall in the future. D. Consumption, Investment and Net-exports rise by the amount government expenditure decreased by.
What are the tools of expansionary fiscal policy?
What are the tools of expansionary fiscal policy?
In the Mundell prescription for monetary and fiscal policy under fixed exchange rates, expansionary fiscal policy...
In the Mundell prescription for monetary and fiscal policy under fixed exchange rates, expansionary fiscal policy and contractionary monetary policy would be recommended if a country were faced with Select one: a. unemployment and a balance-of-payments deficit. b. unemployment and a balance-of-payments surplus. c. inflation and a balance-of-payments deficit. d. inflation and a balance-of-payments surplus.
Under what circumstances should the federal government implement expansionary fiscal policy? Macroeconomics | minimum of 75...
Under what circumstances should the federal government implement expansionary fiscal policy? Macroeconomics | minimum of 75 words
When output gap and inflation gap are positive, the Federal Reserve will adopt a/an   contractionary fiscal...
When output gap and inflation gap are positive, the Federal Reserve will adopt a/an   contractionary fiscal policy.   contractionary monetary policy.   expansionary monetary policy. expansionary fiscal policy
An expansionary fiscal policy will shift which curve in the IS-LM framework? Why that curve?
An expansionary fiscal policy will shift which curve in the IS-LM framework? Why that curve?
According to the Mundell-Fleming model, under fixed exchange rates expansionary fiscal policy causes income to _________,...
According to the Mundell-Fleming model, under fixed exchange rates expansionary fiscal policy causes income to _________, and under flexible exchange rates expansionary fiscal policy causes income to __________. increase; increase increase; remain unchanged remain unchanged; remain unchanged remain unchanged; increase none of the above
“Expansionary fiscal policy is more effective in influencing the aggregate income level when investment is interest-elastic”....
“Expansionary fiscal policy is more effective in influencing the aggregate income level when investment is interest-elastic”. Do you agree with this statement? Why and why not? Explain your answer based on IS-LM framework.