Review this graph and answer questions (a), (b), and (c). a....

Review this graph and answer questions (a), (b), and (c). a. If the full-employment level of output is $$\$ 6,000$$, is the economy in an inflationary or a recessionary gap? What specific fiscal policies could be used to correct this? b. If the full-employment level of output is $$\$ 4,000$$, is the economy in an inflationary or a recessionary gap? What specific fiscal policies could be used to correct this? c. If the full-employment level of output is $$\$ 5,000$$, is the economy in an inflationary or a recessionary gap? What specific fiscal policies could be used to correct this?

Review this graph and answer questions (a), (b), and (c).
a. If the full-employment level of output is $$\$ 6,000$$, is the economy in an inflationary or a recessionary gap? What specific fiscal policies could be used to correct this?
b. If the full-employment level of output is $$\$ 4,000$$, is the economy in an inflationary or a recessionary gap? What specific fiscal policies could be used to correct this?
c. If the full-employment level of output is $$\$ 5,000$$, is the economy in an inflationary or a recessionary gap? What specific fiscal policies could be used to correct this?

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Key Concepts

Aggregate Demand and Aggregate Supply (AD-AS) Model

The AD-AS model represents the total demand and total supply within an economy and illustrates how shifts in these curves can lead to situations where actual output deviates from full-employment output. It serves as a framework to understand changes in price levels and economic output, highlighting gaps between potential and actual economic activity.

Output Gap

The output gap is the difference between the actual level of output produced by an economy and its full-employment level, which indicates the maximum sustainable output. A positive output gap suggests that the economy is producing above its sustainable level (inflationary gap), while a negative output gap shows underproduction (recessionary gap).

Fiscal Policy

Fiscal policy involves the use of government spending and taxation decisions to influence economic activity. In cases of a recessionary gap, expansionary fiscal policy (such as increasing government spending or cutting taxes) is applied to stimulate demand, whereas in an inflationary gap, contractionary fiscal policy (such as reducing spending or increasing taxes) is used to cool down the economy.

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