Our desire is to close the gap, and in order to do so, we will chose some type of fiscal policy.That is, we will either change taxes or government spending in order to close this recessionary gap of 200.ur desire is to close the gap, and in order to do so, we will chose some type of fiscal policy. That is, we will either change taxes or government spending in order to close this recessionary gap of 200.
When the economy is in recessionary gap, the Fed will adopt expansionary monetary policy to increase money supply in the market by buying securities, lowering the reserve rate, and/or decreasing the discount rate. Monetary Policy tools: The Fed can use the following tools to influence the money supply.  The actions of this expansionary fiscal policy would result in a shift of the aggregate demand curve to the right, which would result closing the recessionary gap and helping an economy grow. Typically this type of fiscal policy results in increased government spending and/or lower taxes. A recession results in a recessionary gap meaning that aggregate demand (ie, GDP) is at a level lower than it would be in a full employment situation. Discretionary government spending and tax policies can be used to shift aggregate demand. Expansionary fiscal policy might consist of an increase in government purchases or transfer payments, a reduction in taxes, or a combination of these tools to shift the aggregate demand curve to the right. An expansionary fiscal policy seeks to shift aggregate demand to AD 2 in order to close the gap. In Panel (b), the economy initially has an inflationary gap at Y 1. A contractionary fiscal policy seeks to reduce aggregate demand to AD 2 and In Panel (a), the economy faces a recessionary gap (Y P − Y 1). An expansionary fiscal policy seeks to shift aggregate demand to AD 2 to close the gap. In Panel (b), the economy faces an inflationary gap (Y 1 − Y P). A contractionary fiscal policy seeks to reduce aggregate demand to AD 2 to close the gap. An expansionary fiscal policy seeks to shift aggregate demand to AD 2 in order to close the gap. In Panel (b), the economy initially has an inflationary gap at Y 1. A contractionary fiscal policy seeks to reduce aggregate demand to AD 2 and 1 Thus we have a contractionary / recessionary gap of 1 trillion dollars. 2  We are producing below our full capacity by that amount. 3  Here the government will use expansionary fiscal policy, which will include a cut in taxes and an increase in government expenditure. 1 How would this help close the contractionary gap and bring the economy out of this recession? 2  The basic idea is to take steps which will increase aggregate demand from AD 1 back to AD. 3  Now as the government reduces taxes, people's disposable income (income after taxes or gross income minus taxes) increases. The goal of expansionary fiscal policy is to close a recessionary gap, stimulate the economy, and decrease the unemployment rate. Expansionary fiscal policy is often supported by expansionary monetary policy. An alternative is contractionary fiscal policy. A form of fiscal policy in which an increase in government purchases, a decrease in taxes, and/or an increase in transfer payments are used to correct the problems of a business-cycle contraction. Try this yourself: 1  Try closing an expansionary gap using contractionary fiscal policy. 2  It is not difficult. 3  The logic is the reverse of the one above. 4  The diagram is the reverse of the one described above, where AD is above full employment equilibrium. 5  Contractionary fiscal policy has to bring it down. 1 How would this help close the contractionary gap and bring the economy out of this recession? 2  The basic idea is to take steps which will increase aggregate demand from AD 1 back to AD. 3  Now as the government reduces taxes, people's disposable income (income after taxes or gross income minus taxes) increases. 1 Try closing an expansionary gap using contractionary fiscal policy. 2  It is not difficult. 3  The logic is the reverse of the one above. 4  The diagram is the reverse of the one described above, where AD is above full employment equilibrium. 1 How would this help close the contractionary gap and bring the economy out of this recession? 2  The basic idea is to take steps which will increase aggregate demand from AD 1 back to AD. 3  Now as the government reduces taxes, people's disposable income (income after taxes or gross income minus taxes) increases. Suppose the economy experiences an output gap whereby equilibrium GDP = 8800 and Potential GDP = 9000. This is a recessionary gap, because the equilibrium GDP is less than the Potential GDP. Our desire is to close the gap, and in order to do so, we will chose some type of fiscal policy. That is, we will either change taxes or government spending in order to close this recessionary gap of 200. (a) change (only) in government expenditure. (b) change (only) in taxes. (c) change in both government expenditure and taxes (by the same amount). Changing Government expenditure (only). If we use (only) government expenditure to close a recessionary gap of 200, then we do the following. Our desire is to close the gap, and in order to do so, we will chose some type of fiscal policy. That is, we will either change taxes or government spending in order to close this recessionary gap of 200.
http://staffwww.fullcoll.edu/fchan/macro/4monetary_policy.htm http://economics.fundamentalfinance.com/fiscal-policy.php http://2012books.lardbucket.org/books/macroeconomics-principles-v1.0/s15-02-the-use-of-fiscal-policy-to-st.html http://2012books.lardbucket.org/books/macroeconomics-principles-v1.0/s15-02-the-use-of-fiscal-policy-to-st.html http://www.econmentor.com/macroeconomics-hs/fiscal-policy/how-does-fiscal-policy-close-a-recessionary-gap/text/748.html http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=expansionary+fiscal+policy http://www.econmentor.com/macroeconomics-hs/fiscal-policy/how-does-fiscal-policy-close-a-recessionary-gap/text/748.html http://www.econmentor.com/macroeconomics-hs/fiscal-policy/how-does-fiscal-policy-close-a-recessionary-gap/text/748.html http://econpage.com/202/handouts/AEmodel/fiscalpolicyuse.html http://econpage.com/202/handouts/AEmodel/fiscalpolicyuse.html
how to close a recessionary gap by fiscal policy