Question

How might fiscal policy be used to correct a recessionary​ gap? A. The exchange rate would...

How might fiscal policy be used to correct a recessionary​ gap?

A. The exchange rate would be adjusted to encourage imports.

B. Taxes would be cut to stimulate aggregate demand.

C. The exchange rate would be adjusted to discourage imports.

D. The interest rate would be adjusted to encourage saving.

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Answer #1

The recessionary gap arises when actual GDP is less than the potential GDP.

For filling this gap government uses expansionary fiscal policy. In this goverment either increase its spending or cuts taxes.

Since the expansionary fiscal policy means either an increase in the government expenditure or decrease in the tax. This policy is used for increasing aggregate demand.

Hence taxes would be cut to stimulate aggregate demand and it will correct the recessionary gap.

hence option B is the correct answer.

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