To close the inflationary gap, the government uses contractionary fiscal policies. The contractionary fiscal policy is used to reduce the aggregate demand to the left and close the inflationary gap. The inflationary gap shows in the given diagram,
The inflationary gap closes by using decreasing in government purchases, increase in taxes and a decrease in transfer payments. It is discussed below:
The decrease in government purchases
Contractionary fiscal policies include a diminishing in the funds appropriated to these various organizations. The offices at that point diminish their purchases which diminish the rate of inflation, aggregate production and income. It will shift the aggregate demand to the left.
Increase in tax rates
Contractionary fiscal policy includes either an expansion of the income tax rates or a one-time extra charge. The expansion in taxes gives the household sector less disposable income that can be utilized for consumption expenditures, which at that point diminishes total output and employment and prompts further diminishes in income, hence lessening inflationary pressure.
Decreases in transfer payments
Contractionary fiscal policy includes either a diminishing in payments schedule for at least one of the transfer systems or maybe some in all cases decrease in payments to all who qualify. The diminishing in move transfer payments lessens the disposable income accessible to the household sector, which at that point powers a decrease in consumption expenditures, prompting less aggregate production and employment and consequently an abatement in inflationary pressure.
(10 points) If the government decided today that aggregate demand was excessive and causing an inflationary gap, ho...
(10 points) If the government decided today that aggregate demand was too low and the economy was experiencing a recessionary gap, how could the government use the tools of fiscal policy to correct this problem? Explain what could be done using each of the three tools. Explain the impact on prices in comparison to the self-correcting mechanism discussed in Chapter 10. (All three methods are the same in this respect.) Think in terms of aggregate supply and demand curves.
4. 25 points a. How can the Federal Government help to reduce or close the inflationary gap moving the economy back toward full employment using demand side fiscal policy. > Carefully explain your policy measure. > Account for the role of the spending multiplier in your answer. b. Explain carefully the potential impact, if applicable, on i. Aggregate Demand Aggregate Supply The Price Level The Level of real GDP The Interest Rates, The Budget Deficit, and The Trade Deficit. i....
1. Determine how each of the following monetary or fiscal policy would shift the aggregate demand curve. Illustrate and explain the following effect. a. As the economy is in the state of recession, the government decided to increase government spending. b. Central bank decided to fight an inflationary economy by reducing money supply. c. Under full employment economy, the government has decided to increase taxes on income earned by people.
Aggregate supply and demand problems For each scenario analyze the impacy of the “shocks” on the nation’s employment rate, real GDP, GDP gap anf price level. In addition illustrate the impact of each shock using an aggregate supply and demand diagram. Finally, analyze the policy options available to the government to offset the harmful impact of each of these shocks. UL uld wnen & bank becomes insolvent? Explain res B. Aggregate Supply and Demand Problem ur knowledge of aggregate supply...
Study Guide for Exam Four. Cumulative Material You Want To Know. Module 27. Aggregate Demand. 1. Know the difference between what can cause shifts in the aggregate demand curve. 2. Know what causes movements along the aggregate demand curve. Module 28. Aggregate Supply. 1. What factors cause the short run aggregate supply curve to shift? 2. Know what causes movements along the short run aggregate supply curve. 3. Be able to define and explain the long-run aggregate supply curve. Potential...
a. c. Consider a typical aggregate demand and supply curve of an economy operating at its long-run equilibrium. Express the condition for long-run equilibrium and graphically show the long- run equilibrium of this economy in an AD-AS diagram. b. Explain and graphically show how a positive AD shock affects the short-run equilibrium of this economy. How do the price level and rGDP change in the short term as a result? Does the positive AD shock result in a recessionary gap...
9.What is Say’s Law and what do classical economists say about prices, wages, and interest rates? What are the three states of the economy in relating the real GDP to natural real GDP? In a recessionary gap, is there a surplus or a shortage of production? What does that imply about the labor market and how wages may change? Understand the differences between a recessionary gap, inflationary gap, and long run equilibrium. How is the physical production possibilities frontier (PPF)...
Question: Aggregate Demand stimulus, TARP (Troubled Asset Relief Program) and or also called the bailout package helped to prevent the 2007-2009 US economy's downturn from becoming another Great Depression. Why was the stimulus-fueled recovery substantially weaker than expected? Article: Aggregate Demand Stimulus Helped to Prevent the 2007–2009 Downturn from Becoming Another Great Depression. But Why Was the Stimulus-Fueled Recovery Substantially Weaker Than Expected? In retrospect, it is clear that the U.S. economy was in a precarious position in 2006. Trillions of...
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The LM curve represents A) the single level of output where the goods market is in equilibrium. B) the combinations of output and the interest rate where the goods market is in equilibrium. C) the single level of output where financial markets are in equilibrium. D) the combinations of output and the interest rate where the money market is in equilibrium. E) none of...