Suppose an economy has an inflationary gap.
a. Illustrate this using a graph with LRAS, SRAS, and AD curves. Identify the equilibrium price level, real GDP, and the output gap in your diagram. Be sure to label your diagram fully.
b. Identify two fiscal policy tools which may be used to eliminate the gap.
c. Explain in words how these tools will affect the aggregate demand, long-run aggregate supply, and short-run aggregate supply curves.
d. Incorporate into your graph, the relevant shifts in the curves that would take place when expansionary fiscal policy is used to eliminate the recessionary gap.

Question

Suppose an economy has an inflationary gap. 
a. Illustrate this using a graph with LRAS, SRAS, and AD curves. Identify the equilibrium price level, real GDP, and the output gap in your diagram. Be sure to label your diagram fully. 
b. Identify two fiscal policy tools which may be used to eliminate the gap. 
c. Explain in words how these tools will affect the aggregate demand, long-run aggregate supply, and short-run aggregate supply curves. 
d. Incorporate into your graph, the relevant shifts in the curves that would take place when expansionary fiscal policy is used to eliminate the recessionary gap.

Quizplus · Accepted Answer

The Answer of Suppose an economy has an inflationary gap. 
a. Illustrate this using a graph with LRAS, SRAS, and AD curves. Identify the equilibrium price level, real GDP, and the output gap in your diagram. Be sure to label your diagram fully. 
b. Identify two fiscal policy tools which may be used to eliminate the gap. 
c. Explain in words how these tools will affect the aggregate demand, long-run aggregate supply, and short-run aggregate supply curves. 
d. Incorporate into your graph, the relevant shifts in the curves that would take place when expansionary fiscal policy is used to eliminate the recessionary gap.

Suppose an Economy Has an Inflationary Gap