Explanation A high inflation results in an expansionary gap meaning that aggregate demand (ie, GDP) or actual output is more than the potential output under full employment situation. To reduce the gap, Government needs to bring in certain contractionary policy which will decrease the aggregate demand in the economy. Decreased government spending or increasing the tax rate will reduce the aggregate demand and help to reduce the actual output in the economy. This will reduce the expansionary gap and help in the growth of the economy . If the Aggregate demand shift from D1 to D2 due to contractionary fiscal policy, the aggregate output will decrease from Ya to Yp, i...

5th Edition

ISBN: 9781337000529

Author: William A. McEachern

Publisher: Cengage Learning

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Question

Definition Definition Increase in the amount of goods and services produced by a country in a given period of time compared to an earlier period. Economic growth is generally coupled with a rise in national income or the purchasing power of individuals. It is often measured in terms of the increase in a country's gross domestic product (GDP), or the overall monetary value of all the complete or final services and goods that a country can produce within its domestic boundaries in a specific period.

Chapter 11, Problem 1.8P

To determine

The economy with an expansionary gap.

Concept Introduction:

Fiscal Policy: Fiscal policy is the policy by which government regulates the nation’s economy by adjusting the government spending and controlling the tax rates. It tries to influence the demand side of the economy.

Recessionary Gap: Recessionary Gap is the gap between actual output and potential output under full employment situation when actual output is less than potential output.

Expansionary Gap: Expansionary Gap is the gap between actual output and potential output under full employment situation when actual output is more than potential output.

Expert Solution & Answer

Chapter 11 Solutions

ECON MACRO

Ch. 11 - Prob. 1.1P Ch. 11 - Prob. 1.2P Ch. 11 - Prob. 1.3P Ch. 11 - Prob. 1.4P Ch. 11 - Explain the difference between the government...Ch. 11 - Prob. 1.6P Ch. 11 - Prob. 1.7P Ch. 11 - Prob. 1.8P Ch. 11 - Prob. 2.10P Ch. 11 - Prob. 2.9P

Ch. 11 - Prob. 3.11P Ch. 11 - Prob. 4.12P Ch. 11 - Prob. 5.13P

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