The appropriate policy to pursue in the case of a recessiona

The appropriate policy to pursue in the case of a recessionary gap is best described by which of the following?

a. The government should use fiscal policy to shift aggregate demand to the right.

b. The government should use monetary to shift aggregate demand to the left.

c. The government should use fiscal policy to shift SRAS to the right.

d. The government should use monetary policy to shift the SRAS to the left.

Solution

Correct option is (a).

In present of recessionary gap, aggregate demand is low, so government has to use expansionary fiscal policy by increasing government spending or lowering taxes to increase aggregate demand and shift AD curve rightward.