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(Solved): Discussion Questions: 1. The Economy Is In A Substantial Recessionary Gap. In Order To Fight The Rec ...


Discussion questions: 1. The economy is in a substantial recessionary gap. In order to fight the recessionary gap, the govern
Discussion questions: 1. The economy is in a substantial recessionary gap. In order to fight the recessionary gap, the government decides to employ expansionary fiscal policy. Specifically, the government borrows $400 billion to build a new system of interstate highways. Answer the following regarding potential government choices and the ramifications. 1. Consider a Classical graph of a Recessionary gap. Will this expansionary fiscal policy have a direct impact on SRAS or AD? Explain how this policy will "fix" this recessionary gap. 2. As a result of these policies, what will happen to the price level? Briefly explain. 3. Will this spending cause indirect crowding out? Will it cause direct crowding out? Explain. 4. I'm thinking about borrowing money to buy a car. What can I expect will happen to the interest rates on car loans after the expansionary policy takes place?

Expert Answer


(1) A recessionary gap is caused by a decrease in aggregate demand, which shiftsAD curve leftward, decreasing both price level and real GDP. When governmentincreases spending to increase real GDP,
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