Use the following to answer questions:
-If the economy is at equilibrium above potential output,there is a(n)_____ gap,and a(n)_____ fiscal policy is appropriate.
A) recessionary;expansionary
B) inflationary;contractionary
C) recessionary;contractionary
D) inflationary;expansionary

Question

Use the following to answer questions: 
-If the economy is at equilibrium above potential output,there is a(n)_____ gap,and a(n)_____ fiscal policy is appropriate.
A) recessionary;expansionary 
B) inflationary;contractionary 
C) recessionary;contractionary 
D) inflationary;expansionary

Quizplus · Accepted Answer

When the economy is at equilibrium above potential output, there is an inflationary gap, and a contractionary fiscal policy is appropriate. This is because an inflationary gap occurs when aggregate demand exceeds aggregate supply, leading to higher prices and inflation. A contractionary fiscal policy reduces aggregate demand by increasing taxes or decreasing government spending, which helps to close the inflationary gap and bring the economy back to equilibrium.

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