What is a recessionary gap? What would be the appropriate fiscal policy to comba
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What is a recessionary gap? What would be the appropriate fiscal policy to combat or offset one? What is an inflationary gap? What would be the appropriate fiscal policy to combat or offset one? Please answer the entire question for a good rating. Thanks. What is a recessionary gap? What would be the appropriate fiscal policy to combat or offset one? What is an inflationary gap? What would be the appropriate fiscal policy to combat or offset one? Please answer the entire question for a good rating. Thanks.Explanation / Answer
Recessionary gap refers to the situation when the short run equilibrium of AS/AD reaches to the output level lesser than the long-run equilibrium level. In order to combat or offset a recessionary gap, the government should incorporate expansionary fiscal policy. If the government would increase its purchases and decrease the taxes, then AD would increase that would help in combating the recessionary gap.
Inflationary gap refers to the situation when the short run equilibrium of AS/AD reaches to the output level greater than the long-run equilibrium level. In order to combat with this situation, the government should reduce its purchases and increase the taxes. Doing this would further decrease the AD. Hence, the inflationary gap would be diminished.
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