The diagram below is for a closed economy which begins in long-run equilibrium at Y* and . FIGURE 31-3
-Refer to Figure 31-3.Suppose the government implements an expansionary fiscal policy which increases the budget deficit.The initial effect of this policy is the opening of a(n)________ gap,and a new short-run equilibrium with a price level of ________ and real GDP of ________.

Question

The diagram below is for a closed economy which begins in long-run equilibrium at Y* and  .  FIGURE 31-3
-Refer to Figure 31-3.Suppose the government implements an expansionary fiscal policy which increases the budget deficit.The initial effect of this policy is the opening of a(n)________ gap,and a new short-run equilibrium with a price level of ________ and real GDP of ________.

Quizplus · Accepted Answer

An expansionary fiscal policy increases aggregate demand, leading to an increase in both price level and real GDP. However, in the short run, firms cannot immediately increase the quantity supplied, leading to inflationary pressure. Therefore, the short-run equilibrium will have a higher price level (P₁) and a higher real GDP (Y₁) than the initial equilibrium. The economy is in an inflationary gap.

The Diagram Below Is for a Closed Economy Which Begins