Question

Suppose the economy is stuck in a Recessionary Gap. Now the government wants to deploy expansionary Fiscal Policy tools to move the economy back to long-run equilibrium. Explain the following scenarios with appropriate graphs: a. There are no lags in the implementation process. b. There are lags in the implementation process.

Answer 1

a) When people got money they started to spend money right away. Increase demand and amount of money as a result supply and investments increase.

b) People afraid to spend money immediately. At first, saving grow then demand increase with prices. After for all of that increase supply.