How can expansionary fiscal policies support an economy in closing a deflationary/recessionary gap?

Expansionary fiscal policies expand aggregate demand (AD) by increasing government spending and/or decreasing income and corporate taxation. As a result, a recessionary (a.k.a. deflationary) gap, which is caused by insufficient AD can be closed. AD1 intersects the neo-classical SRAS curve 'a' and Keynsian AS curve 'b' at a level of real GDP (Y1). This is below the full employment level of output (YFE). Expansionary fiscal policies shift AD rightwards (AD1 to AD2), closing the gap. This causes more inflation (PL1 to PL2) and less growth (Y1 to Y2) in the neo-classical model compared to the Keynsian model.

Answered by Sai Bhargav K. Economics tutor

6156 Views

See similar Economics IB tutors

Related Economics IB answers

All answers ▸

What factors influence the shift of a demand curve?


Under what conditions can a firm sell the same product at different prices?


Discuss the impacts of a price ceiling on stakeholders


Explain price elasticity of demand and how this may impact government taxation


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2024

Terms & Conditions|Privacy Policy
Cookie Preferences