Analysis of Recessionary and Expansionary Gaps in Macroeconomics

This assignment examines the concepts of recessionary and expansionary gaps in macroeconomics, focusing on the US economy. It defines recessionary gaps as periods of reduced economic activity and the government's role in stabilizing the economy. Conversely, it explains expansionary gaps where the current GDP exceeds the anticipated GDP, often indicating full employment. The assignment highlights the current expansionary phase in the US, driven by increased government spending and tax cuts, which boost aggregate demand and employment. It also mentions the use of both fiscal and monetary policies, with the Federal Reserve managing money supply and interest rates and the government controlling spending and taxation. The assignment concludes with a Keynesian perspective on fiscal policy and includes references to relevant economic literature.

RUNNING HEAD: MACROECONOMICS
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Recessionary and Expansionary Gaps
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Macroeconomics
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Recessionary and Expansionary Gaps in the US economy
Recessionary gap is seen in the economy when there is reduction in the economic
activities and consumer expenditure. This shows that an economy is operating below its full
employment equilibrium. During that time government of country intervene in order to stabilize
the situation and to reduce the gap by increasing real GDP of the country. Expansionary gap
describes the gap in the current level of GDP and anticipated GDP. For inflationary or
expansionary gap current GDP should be higher than the estimated GDP that means economy is
at full employment (McEachem, 2016). Currently the US economy is at the longest expansion
period in the history because gross domestic product of the country is growing for the last 121
months as unemployment rate in the country dropped by 10 percent as compare to 2009 for that
government use tools like fiscal and monetary policy (Frazee, 2019). Monetary policy is used to
control the supply of money in the economy and to manage interest rates and in the US, Federal
Reserve is in charge of implementing this tool. Fiscal policy includes spending and taxing
actions taken by the government (Aldama & Creel, 2018). At this expansionary stage in the US,
government expenditure increases and tax rates decreases that increase the flow of money in the
economy and it resultant in increase in aggregate demand in the economy that brings more
employment opportunities for the citizen and this is the stage of expansion in the country.
Currently in the US both the executive and legislative branches of government decided to
increase the expenditure to boot the economy.
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Price Level
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Macroeconomics
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Fiscal Policy: Keynesian Perspective
References
Aldama, P., & Creel, J. (2018). Fiscal Policy in the US. Economic Modelling, 12.
Frazee, G. (2019, July 10). Can the longest economic expansion in U.S. history last? Retrieved
from https://www.pbs.org/newshour/economy/making-sense/can-the-longest-economic-
expansion-in-u-s-history-last
McEachem, W. A. (2016). Economics: A contemporary introduction. US: Cengage Learning.
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