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In: Economics

Indicate whether each of the following statements is true, false, or uncertain, and explain your answer...

Indicate whether each of the following statements is true, false, or uncertain, and explain your answer in great detail. If a word or phrase is italicized and bolded your answer must include a concise definition of the word or phrase. You must include graphs when necessary.

How does an economy get out of a recessionary gap? (use a graph.)

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Expert Solution

A recession occurs when the real GDP falls below the full employment level of the output.To get out of the recession a expansionary fiscal or the monetary policy is used. The expansionary fiscal policy is the use of increase in the government spending or the cut in the taxes. The expansionary monetary policy is increasing the money supply in the economy by using the various monetary policy tools. When an expansionary fiscal or the monetary policy is used the aggregate demand in the economy increases and this pulls the economy towards the full employment level of output and the recessionary gap is closed. When the expansionary policy is used it adds more money in the hands of people and they consume and invest more, since the consumption and the investment is the components of the aggregate demand the aggregate demand increases. This is shown by the below graph.

Initially the economy was the point E where there was a recessionary gap, to close that gap the government may introduce the expansionary fiscal or monetary policy. When there is a expansionary policy the AD curve shifts to the right. And this will close the recessionary gap and will be out of the recession.

Rahul Sunny answered 2 years ago
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