Chapter 20, Problem 2FRQ

a)

To determine

The graph showing an economy experiencing a recessionary gap.

Explanation of Solution

  

The graph shows the aggregate price level on the vertical axis and real GDP on the horizontal axis. The aggregate demand curve (AD) would slope downward as it increases with the decline in price but the short-run aggregate supply curve (SRAS) is represented as an upward slope because with the price increase the real GDP would also increase but the long-run average supply curve would remain fixed as a vertical line (LRAS) because it will not change with the price change. This graph shows the recessionary gap as real GDP is lower than the GDP at the level of full employment.

Economics Concept Introduction

Introduction: Fiscal policy is a policy through which government spending and tax policies are used to make economic conditions better. And, the monetary policy increases or decreases the supply of money with the control of interest rates.

b)

To determine

Type of fiscal policy which is appropriate in this situation.

Explanation of Solution

Expansionary fiscal policy would be appropriate in this situation because through this policy, the government can reduce the tax rate, transfer payments, and increase its spending to decrease the recessionary gap such as spending on infrastructure facilities.

Economics Concept Introduction

Introduction: Fiscal policy is a policy through which government spending and tax policies are used to make economic conditions better. And, the monetary policy increases or decreases the supply of money with the control of interest rates.

c)

To determine

What the government could do to implement the type of policy.

Explanation of Solution

In this case, the government would implement the recessionary fiscal policy by increasing government spending and decreasing the tax rates so that there would better facilities in the country, which helps the government to control the recessionary gap in the economy.

Economics Concept Introduction

Introduction: Fiscal policy is a policy through which government spending and tax policies are used to make economic conditions better. And, the monetary policy increases or decreases the supply of money with the control of interest rates.