Discuss what fiscal policy is and how it can be used to close a recessionary gap...

Discuss what fiscal policy is and how it can be used to close a recessionary gap or an inflationary gap.

Expert Solution

Fiscal policy is the means through which a government adjusts its levels of spending and tax rates to monitor and influence the economy of a nation. It is the sister monetary policy tool, in which a central bank controls the money supply of a country. These two strategies are used in various variations to guide the economic priorities of a government.

Fiscal policies should be used to address gaps in production. Fiscal policy involves stabilizing the economy through either taxation or government spending. Expansionary fiscal policies can close recessionary gapa(using either lower taxes or higher spending) and contractionary fiscal policies can close inflation gaps (using either higher taxes or lower spending).

Expansionary fiscal policy is designed to stimulate the economy during or in anticipation of a contraction in the business cycle. That is accomplished by increasing net spending and aggregate demand by either increasing government expenditures (both budget sales and dividend payments) or reducing taxation. Expansionary economic strategy results in a greater budget deficit or a lower budget surplus.

Expansionary fiscal reform requires an expansion in appropriated funds for these various departments. The agencies then make the additional purchases that stimulate aggregate production, boost revenue and increase employment levels.

Rahul Sunny answered 2 years ago

how fiscal policy such as changing government expenditure may close recessionary gap/ inflationary gap.

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Outline how counter cyclical fiscal policy and balanced budget fiscal policy would close a recessionary gap....

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