Question:Specifically, in detail, and with relevant examples answer the following: 1) How does...

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Question:Specifically, in detail, and with relevant examples answer the following: 1) How does Fiscal and Monetary Policy in theory each correct both a Recessionary and an Inflationary Gap; 2) Explain the “Recognition Lag”, “Net Export Effect”, “State and Local Finance”,“Cyclical Asymmetry”, and the “Liquidity Trap” issues with regard to Fiscal and Monetary Policy; and 3) in what specific ways, if any, are these issues either Strengths or Weaknesses of these two Macro-stabilization policies.Be specific and thorough.

Alomita · Accepted Answer

1.  Correction of recessionary and inflationary gap :
The  contractionary fiscal policies reduces inflationary gap by reducing  government spending , increasing taxes , increasing  interest rates and reducing transfer payments.  The expansionary fiscal policies  closes recessionary gaps. Similarly, an expansionary monetary policy increases money supply , reduces  interest rates,  lowering recessionary gaps. In order to reduce inflationary gap, central banks increases rate of interests.
2.

Question: Specifically, in detail, and with relevant examples answer the following: 1) How does Fiscal and Monetary Policy in theory each correct both a Recessionary and an Inflationary Gap; 2)...

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