The table above shows Econland’s economy aggregate demand and aggregate supply schedules. Econland’s potential GDP is $400 billion. (4). Does Econland have an inflationary gap or a recessionary gap? (5). What is the size of the gap? (6). What specific fiscal policy would you prescribe to close the gap?

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Fiscal Policy and Money Market

Fiscal policy is one of the important tools that is used by the government to control inflation or aggregate demand in the economy. Under this policy, there are two rules which are used by the government, one is the expenditure of the government and the other is the taxation or income of the government which it collects from the public.