Question

Suppose that the economy starts out in a recessionary gap. If the government uses demand-side fiscal policy to push the economy out of the recessionary gap, the results will most likely be a(n) _____ in Real GDP and a(n) _______ in the price level.

a. increase; increase
b. decrease; increase
c. increase; decrease
d. decrease; decrease

Answer 1

a. increase; increase

Step-by-step explanation:

Suppose that the economy starts out in a recessionary gap. If the government uses demand-side fiscal policy to push the economy out of the recessionary gap, the results will most likely be an increase in Real GDP and an increase in the price level. A demand side policy (i.e. increasing the government purchases and decreasing the taxes) will increase the demand and output in the economy. That will in turn shift the aggregate demand to the right and the new equilibrium will be at a higher price and higher output.