Answer to Question #234685 in Macroeconomics for Mahendran

Question

Identify and briefly explain the type of fiscal policy that could be used to solve the

recessionary gap.

Answer 1

Fiscal policy definition.

This refers to the use of government spending or taxes to make the economy stable by influencing the economic conditions.

The government uses fiscal policy to influence aggregate demand levels to achieve set economic goals of price stability, reaching full employment, and attaining growth of the economy.

Expansionary fiscal policy is the one that can be used to close the recessionary gaps. It does so by increasing government spending which in return increases aggregate demand for goods and services or through reduction of tax rates to boost consumer purchasing power.