Analysis indicates that the economy is in a recessionary gap.Which of the following is the most appropriate policy mix in this situation?

Question

Quizplus · Accepted Answer

In a recessionary gap, the economy is operating below its potential output and is suffering from high unemployment and low aggregate demand. The appropriate policy mix in this situation is expansionary fiscal policy (increasing government spending and/or reducing taxes) and expansionary monetary policy (reducing interest rates and increasing money supply).

Option A is incorrect because a budget surplus would further reduce aggregate demand, aggravating the recessionary gap. Option C is incorrect because contractionary monetary policy (increasing interest rates and reducing money supply) would also reduce aggregate demand and worsen the recessionary gap. Option D is incorrect because a budget surplus and contractionary monetary policy would worsen the recessionary gap by reducing aggregate demand even further.

Therefore, Option B (a budget deficit and expansionary monetary policy) is the most appropriate policy mix in a recessionary gap. The budget deficit would increase government spending and stimulate aggregate demand, while expansionary monetary policy would reduce interest rates and increase money supply, further boosting aggregate demand.

Analysis Indicates That the Economy Is in a Recessionary Gap