Fiscal policy: It is a measure taken by the government to influence the economy of any nation. It is done by the government to adjust the spending level of the economy and also to influence the tax rate. Expansionary Fiscal policy: This policy is followed by the government to expand the production activities in the economy. This is done by increasing the expenses and cutting the earnings of the government. Contractionary Fiscal policy: This policy is followed by the government to contract the production activities in the economy. This is done by reducing the expenses and increasing the earnings of the government. Inflationary gap: At the level of full employment, if the value of the real GDP is greater than the value of potential GDP, it leads to emergence of inflationary gap. Recessionary gap: At the level of full employment, if the value of the potential GDP is greater than the value of real GDP, it leads to emergence of recessionary gap.

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Chapter 17, Problem 3P

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Concept Introduction:

Fiscal policy: It is a measure taken by the government to influence the economy of any nation. It is done by the government to adjust the spending level of the economy and also to influence the tax rate.

Expansionary Fiscal policy: This policy is followed by the government to expand the production activities in the economy. This is done by increasing the expenses and cutting the earnings of the government.

Contractionary Fiscal policy: This policy is followed by the government to contract the production activities in the economy. This is done by reducing the expenses and increasing the earnings of the government.

Inflationary gap: At the level of full employment, if the value of the real GDP is greater than the value of potential GDP, it leads to emergence of inflationary gap.

Recessionary gap: At the level of full employment, if the value of the potential GDP is greater than the value of real GDP, it leads to emergence of recessionary gap.

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