4 a. Explain the two ways that an economy could close an inflationary gap. Explain what...

4 a. Explain the two ways that an economy could close an inflationary gap. Explain what happened to price and GDP in each solution. Which “solution” created lower prices? List a pro and con of each “solution”.

b. What policy would you put into effect to help reduce the inflationary gap in an economy like Canada? How would businesses and/or Canadians be effected?

Expert Solution

A) The inflationary gap happen when there is a gap between aggregate demand and aggregate supply. There is to close this inflationary gap the government take mainly some fiscal and monetary measures. That means mainly contradict the fiscal policy and also reduce the money supply that ultimately reduce the demand.

If made contradictory fiscal policies that made gdp increase and government expenditure also decrease and the tax become increase and the price also lead to decrease after the effect of decreasing of demand.

B) The developed countries like Canada they will mainly take decisions for reducing the inflationary gap to their economy to focus to monetary policy on the side of bank . Bank policies are help to maintain to stable inflationary level and which is low also. Mainly they increase the interest rate of borrowings and that lead to reduce the growth rate in company's goods demand also the personal household demand.that will really help in reducing inflationary gap

Rahul Sunny answered 6 months ago

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