(For students who were assigned Chapter 28) Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap (Figure 28.7). Explain how equal-size increases in G and T could eliminate a recessionary gap and how equal-size decreases in G and T could eliminate an inflationary gap. FIGURE 28.7 Recessionary and inflationary expenditure gaps. The equilibrium and full-employment GDPS may not coincide.(a) A recessionary expenditure gap is the amount by which aggregate expenditures at the full-employment GDP fall short of those needed to achievethe full-employment GDP Here, the $5 billion recessionary expenditure gap causes a $20 billion negative GDP gap. (b) An iflationary expendituregap is the amount by which aggregate expenditures at the full-employment GDP exceed those just sufficient to achieve the full-employment GDP.Here, the inflationary expenditure gap is $5 billion; this overspending produces demand-pull inflation.AE2AE,AEo530AET530510510Recessionaryexpendituregap = $5 billionInflationaryexpendituregap = $5 billion490490FullFull45°employment45°employment490510530490510530Real GDPReal GDP(а)Recessionary expenditure gap(b)Inflationary expenditure gapAggregate expenditures(billio ns of dollars)Aggregate expenditures(billions of dollars)

Recessionary gap occurs when the actual real GDP is less than the potential real GDP. To close the…

Answered: FIGURE 28.7 Recessionary and…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Question

(For students who were assigned Chapter 28) Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap (Figure 28.7). Explain how equal-size increases in G and T could eliminate a recessionary gap and how equal-size decreases in G and T could eliminate an inflationary gap.

FIGURE 28.7 Recessionary and inflationary expenditure gaps. The equilibrium and full-employment GDPS may not coincide.
(a) A recessionary expenditure gap is the amount by which aggregate expenditures at the full-employment GDP fall short of those needed to achieve
the full-employment GDP Here, the $5 billion recessionary expenditure gap causes a $20 billion negative GDP gap. (b) An iflationary expenditure
gap is the amount by which aggregate expenditures at the full-employment GDP exceed those just sufficient to achieve the full-employment GDP.
Here, the inflationary expenditure gap is $5 billion; this overspending produces demand-pull inflation.
AE2
AE,
AEo
530
AET
530
510
510
Recessionary
expenditure
gap = $5 billion
Inflationary
expenditure
gap = $5 billion
490
490
Full
Full
45°
employment
45°
employment
490
510
530
490
510
530
Real GDP
Real GDP
(а)
Recessionary expenditure gap
(b)
Inflationary expenditure gap
Aggregate expenditures
(billio ns of dollars)
Aggregate expenditures
(billions of dollars)

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 2 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions