Illustrate how fiscal policy can close contractionary gap

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Reference no: EM131004180

1. In the diagram use aggregate demand and short-run ag- gregate supply curves to show an economy at a short-run equilibrium, with a $0.5 trillion contractionary gap when potential output is $9.5 trillion. Identify the equilibrium point and price level. Illustrate how fiscal policy can close the contractionary gap.

2. In the diagram use aggregate demand and short-run ag- gregate supply curves to show an economy at a short-run with a $0.5 trillion expansionary gap when potential out- put is $9.5 trillion. Identify the equilibrium point and price level. Illustrate how fiscal policy can close the ex- pansionary gap.

Reference no: EM131004180

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