Question

5. If there is a recessionary or an inflationary gap in the economy, what types of policies might the government invoke?

Answer 1

When there is a recessionary gap in the economy the people in the economy faces less money in the economy so the government :

Increase government spending

Decrease taxes

or do both

The policy will stimulate the economy, and the economy moves to its normal state.

this policy called expansionary fiscal policies

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When there is an inflationary gap in the economy means there is a lot of money to buy goods, but there are fewer goods available, so the prices increase where the government

Decrease government spending

increase taxes

or do both

The economy less stimulates and moves to its normal state. this policy called contractionary fiscal policies