This is so confusing for me, maybe i\'m over thinking it but sheesh. The accompa
ID: 1204829 • Letter: T
Question
This is so confusing for me, maybe i'm over thinking it but sheesh.
The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant to help the economy move to potential output, Yp
Is Albernia facing a recessionary or inflationary gap?
Which type of fiscal policy—expansionary or contractionary—would move the economy of Albernia to potential output, Yp? What are some examples of such policies?
Illustrate the macroeconomic situation in Albernia with a diagram after the successful fiscal policy has been implemented.
Aggregate price level LRAS SRAS AD Y1 Yp_-Potential Real PPotential Real GDP outputExplanation / Answer
Albernia is facing a recessionary gap situation because real GDP is less than potential output at the full employment level. In this situation, an expansionary fiscal policy should be pursued in the economy which would move the economy of Albernia to potential output. In this form of fiscal policy there is increase in government purchases, decrease in taxes, and increase in transfer payments to curb the problems of such business-cycle contraction.
(I was unable to upload the diagram, so kindly refer to the link: http://www.economicshelp.org/blog/4886/monetary-policy/expansionary-monetary-policy/)
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