1) Graph a recessionary gap on a graph of AD/AS. Recommend the appropriate fiscal policy to close a recessionary gap.
ANSWER: The government should increase spending (G) or decrease personal income taxes (C will increase because disposable income (after tax income) of consumers will increase).
2) Illustrate the shift in AD on your graph in part 1). Explain how the shift in AD will impact output, unemployment, and the price level.
ANSWER: The increase (right shift) in AD will cause output to increase, unemployment to decrease, and result in an increase in the price level.
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