Disequilibrium as there is recessionary gap

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Reference no: EM131000121

The economy is starting from a point of disequilibrium as there is a recessionary gap. Potential GDP is $600 billion and the recessionary gap is $50 billion. An economic shock then hits this economy and there is a sudden drop in the value of the Canadian dollar. What happens to the recessionary gap if the change in Net Exports from the drop in the Canadian dollar is $20 billion with the mpc=.7 and mpm =.1? Graph the scenario using the data points. However, the government had been planning on dealing with the recessionary gap on their own and introducing a fiscal policy tool to eliminate the gap. What happens if the government decides to lower income taxes by $20 billion at the same time as the dollar suddenly drops in reaction to this recessionary gap. What is the resulting impact on Consumption and GDP and what happens to the recessionary gap? As either a Classical economist, critique this policy move, or as a Keynesian economist, defend this policy move by the government.

Reference no: EM131000121

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