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.

SB
Answered by Sai Bhargav K. Economics tutor

7552 Views

See similar Economics IB tutors

Related Economics IB answers

All answers ▸

What is the difference between demand and aggregate demand?


Consider a competitive market, that has recently had an ad valorem sales tax imposed. Show this on a diagram. What is the impact on the market equilibrium? If the demand curve becomes more inelastic, which side of the market suffers more?


Explain the difference between marginal returns to factor and returns to scale?



What are the distinctive characteristics of a perfectly competitive market?


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2025

Terms & Conditions|Privacy Policy
Cookie Preferences