Suppose the economy had been producing at potential GDP but now is in recession. Which of the following are discretionary fiscal policies that could bring the economy closer to potential GDP?
Check all that apply.
O A reduction in government purchases
O A tax hike
O Additional spending on national park facilities
O A tax cut
Additional spending on national park facilities and A tax cut
When an economy is producing below its full potential, recessionary gap is produced. Recessionary gap is the difference created between when an economy produces at it full potential and when it is producing below it full potential. To solve recessionary gap, government often enact expansionary fiscal policy to boost aggregate demand which involves government increasing the amount of money in circulation for example by spending on national park facilities or by initiating a tax cut.