If the economy is at equilibrium below potential output, there is a(n) _____ gap, and _____ fiscal policy is appropriate.
A) recessionary; expansionary
B) inflationary; expansionary
C) recessionary; contractionary
D) inflationary; contractionary

Question

Quizplus · Accepted Answer

If the economy is at equilibrium below potential output, it means that there is an insufficient demand, leading to decreased production and increased unemployment. This type of situation is called a recessionary gap, and the appropriate fiscal policy to deal with this is an expansionary policy. Expansionary fiscal policy involves increasing government spending and/or decreasing taxes to increase aggregate demand and stimulate economic growth.

If the Economy Is at Equilibrium Below Potential Output, There