Question

1.Outline how counter cyclical fiscal policy and balanced budget fiscal policy would close a recessionary gap. Be specific on goals, how each theory would achieve those goals, how they would close the gap, and potential negative effects.

2.According to monetary policy, explain how the Bank of Canada would react to a recession. Be specific on goals, how they would achieve those goals, how they would close the gap, and potential negative effects.

3.Please describe how the PPC curve represents scarcity, choice and opportunity cost.

4.Discuss the differences calculating GDP using the expenditure approach and income approach. Be specific, do not just write the formula.

Answer 1

Answer1

A recessionary gap is a macroeconomic term which describes an economy operating at a level below its full-employment equilibrium. Under a recessionary gap condition, the level of real gross domestic product (GDP) is lower than the level of full employment, which puts downward pressure on prices in the long run.  Significant reductions in economic activity for several months will indicate a recession.  Such gaps close when real wages return to equilibrium, where the quantity of labor demanded equals the quantity supplied.

When an economy is facing recession, governement can adopt expansionary fiscal policy to increase money supply and boost demand in the economy. Fiscal Policy is the use of governement spending and taxation to influence the economy to close recessionary gap, government can do so by reducing the tax or increasing public spending. For example a tax cut by the governement raises disposable income of the people and aggregate demand will increase which will help the economy to revive and grow. Simillarily government has to maintain a balance between revenue and spending to close the recessionary gap. Generally in an expansionary fiscal policy, government spending wil be higher than revenue which results in an increase in the income of the people which in turn pulls aggregate demand in the economy. Thus countercyclical fiscal policy and balanced budget helps close the recessionary gap in an economy.

Answer2

Monetary Policy refers to the policy adopted by the central bank of a country that controls money supply or interest rates to maintain price stabilty and general trust in the currency. Normally during infation, monetary authority adopts contractionary monetary policy and during recession expansionary monetary policy is adopted. So the Bank of Canada will go for expansionary monetary policy to check recession or expand the economy. Bank of canada can go for quantitative easing or reducing the interest rates to inject liquidity in the economy. The Bank can make the loans cheaper and increase credit flow in the economy, thereby increasing money supply in the economy and aggregate demand will rise. Thus recessionary situation can be checked and business will expand.