Explanation Figure-1 indicates the role of expansionary fiscal policy when the economy faces a recessionary gap as shown below: In Figure-1, the vertical axis measures the price level and the horizontal axis measures the real GDP. Here, at point 1, the economy faces a recessionary gap, which means aggregate demand (AD) is less than the short-run aggregate supply (SRAS). According to the Keynesian point of view, economy will not adjust itself. Therefore, the government has to introduce an expansionary fiscal policy through increasing expenditure and reducing tax revenues to eliminate the recessionary gap. An increase in spending will move the AD curve rightward from AD1 to AD2. Finally, at point 2, economy reaches the natural level of real GDP...

12th Edition

ISBN: 9781285738314

Author: Roger A. Arnold

Publisher: Cengage Learning

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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 …

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Chapter 11, Problem 6WNG

To determine

Graphically illustrate the role of fiscal policy on economic fluctuations.

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Macroeconomics (Book Only)

Ch. 11.1 - Prob. 1ST Ch. 11.1 - Prob. 2ST Ch. 11.1 - Prob. 3ST Ch. 11.1 - Prob. 4ST Ch. 11.3 - Prob. 1ST Ch. 11.3 - Prob. 2ST Ch. 11.3 - Prob. 3ST Ch. 11.4 - Prob. 1ST Ch. 11.4 - Prob. 2ST Ch. 11 - Prob. 1VQP

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Is expansionary fiscal policy more attractive to politicians who believe in larger government or to politicians who believe in smaller government? Explain your answer.

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