Question

The economy of Palestine is suffering from recession, use the suitable economic policy to correct this situation.

Explain briefly & Graph your answer using Ad & AS model.

Answer 1

As the economy of Palestine is suffering from recession, current output level would be less than its potential level which result in recessionary gap in the economy.

Government can adopt expansionary fiscal policy through which they raise government spending and reduce tax such that it raise disposable income of consumers and tends to raise aggregate demand in the economy which shift demand curve from demand to new demand and take economy to its potential level which vanish recessionary gap.