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How should I draw a graph of the economy in a recessionary (or inflationary) gap situation...

How should I draw a graph of the economy in a recessionary (or inflationary) gap situation on the graph and show how expansionary (or contractionary) fiscal policy works?

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Answer #1

Below is a graph of a recessionary gap where current output is less than the full employment level of output. This called recessionary gap because it is a demand side reduction in economic activity.

Below is a graph of a inflationary gap where current output is more than the full employment level of output. This called inflationary gap because it is a demand side increase in economic activity.

For recessionary gap, expansionary policy shifts AD to the right so that AD SRAS and LRAS all meet at a new and higher equilibrium

For inflationary gap, contractionary policy shifts AD to the left so that AD SRAS and LRAS all meet at a new and lower equilibrium

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