The diagram below shows an AD/AS model for a hypothetical economy which is initi

Question

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short- run equilibrium at point A. an inflationary; 100; fiscal contraction a recessionary; 200; fiscal expansion a recessionary; 100; fiscal contraction an inflationary; 350; fiscal expansion an inflationary; 200; fiscal contraction Consider Figure 24 - 7. At the initial short - run equilibrium, there is_____output gap of_____. This gap could be closed by a_____. an inflationary; 100; fiscal contraction a recessionary; 200; fiscal expansion a recessionary; 100; fiscal contraction an inflationary; 350; fiscal expansion an inflationary; 200; fiscal contraction

Explanation / Answer

When short run Equillibrium occurs at an output level above potential output the output gap is called as inflationary gapor Expansionary Gap.

There is a difference of 200 in potential and equillibrium hence Infaltionary gap of 200 this gap is to be closed by Fiscal contraction in order to minimize the consequences of growing inflation.

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