If the recessionary GDP gap is $500,then the proper fiscal stimulus when faced with an upward-sloping AS curve is to

Question

Quizplus · Accepted Answer

When faced with an upward-sloping AS curve, a rightward shift in the AD curve will increase both output and prices. To close the recessionary GDP gap of $500, it would be necessary to increase aggregate demand by more than $500. This is because the increase in output from the shift will also cause an increase in prices, meaning that the actual increase in output will be less than the increase in nominal GDP. Therefore, shifting the AD curve rightward by more than $500 would be the proper fiscal stimulus to close the gap.

If the Recessionary GDP Gap Is $500,then the Proper Fiscal