Homework Answers
When potential real GDP is greater than the actual real GDP, then this gap is known as a recessionary gap.
The inflationary gap arises, when actual output is greater than the potential output. So for closing the gap, government need to use Contractionary fiscal policy, therefore either decreases the government spending or increase tax. Hence the budget deficit will decreases.
The required increase in the government spending is= gap / spending multiplier
=(800-400)/6
=400/6
=$66.67 billion
Hence $66.67 billion is required by government to spend for closing this gap.
10.
As it can be seen in the diagram that inflationary gap is=(400-200)
=$200 billion
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