Use the following to answer question 13: Recessionary Gaps. At E_2, the economy:

Question

Use the following to answer question 13: Recessionary Gaps. At E_2, the economy: is in equilibrium, has an inflationary gap. has a recessionary gap. has high unemployment. An inflationary gap can be closed with: expansionary monetary policy, a decrease in taxes, a decrease in government purchases, expansionary fiscal policy. If expansionary fiscal policy is most likely to crowd out private spending. the unemployment rate is 15% aggregate income is $500 billion above its potential level aggregate income is $800 billion below its potential level aggregate output is $300 billion below its potential level

Explanation / Answer

(13) (A)

At point E2, AD = SRAS = LRAS, leading to equilibrium.

(14) (C)

When there is inflationary gap, actual output exceeds potential output and so, the gap is closed by reducing aggregate demand. Only a decrease in government spending will achieve this, among given options.

(15) Cannot be answered without the required diagram.

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