Question

1. Suppose that there is a recessionary gap. Discuss one fiscal policy action that might eliminate it. Show how the action taken will bring about the desired result?

2. Define the term the Marginal Propensity to Consume. What is the relationship between the MPC and the multiplier?

3. What are the major difference between the assumption made by Say and those made by Keynes?

4. What are United States coins called token Money? What is meant by near money?

5. What are the functions of the Federal Reserve Banks?

6. Explain the Paradox of Thrift

Answer 1

1. If there is a recessionary gap, this means that the real output is less than the potential output. Therefore, there is a scope in the economy to increase output and expand further. In this situation, the government should take up an expansionary fiscal policy. Expansionary fiscal policy involves reducing taxes or increasing government expenditures or both. The expansionary fiscal policy helps in increasing aggregate demand, which helps firms increase production. As a result, total output increases and the real GDP eventually becomes equal to the potential GDP, thereby, the recessionary gap is filled.