Chapter 11, Problem 1E

To determine

The role of aggregate demand and the effect of AS curve in fiscal policy to eliminate the GDP gap.

Explanation of Solution

A sum of supply of goods and services that firms in an economy plan to trade during a precise time episode is called aggregate supply. To purge the Gross Domestic Product gap, aggregate expenditures must go up to fetch equilibrium real Gross Domestic Product up to potential real Gross Domestic Product. By lowering down taxes or rising up the government expenditure, Gross Domestic Product gap can be bunged.

Aggregate supply is not exaggerated by the change in fiscal policy, expecting a superior change in real Gross Domestic Product by the examination of government expenditure and taxation assumptions.

Economics Concept Introduction

The difference between potential Gross Domestic Product and the equilibrium level Gross Domestic Product is known as the Gross Domestic Product gap.

The utmost point of real Gross Domestic Product that can be persistent over the elongated term is known as potential Gross Domestic Product. When aggregate supply and aggregate demand are equal it is said to be equilibrium level Gross Domestic Product.

The Gross Domestic Product Gap is the gap between the real entire output and the potential entire output.