How large a recessionary gap would be created? What policies might restore the economy to full employment?
Answer Click the Reset button to restore all spending to initial levels. Equilibrium GDP is £5000. Then, drag the Consumption slider all the way down from 3520 to 3120. Click Adjust Income to observe the corresponding drop in GDP. A recessionary gap of £400 is created. This gap can be eliminated by any combination of policies which would increase spending by £400 – any increase in government spending, investment or net exports, or a reduction in taxes which combine for a net increase of £400 in spending will eliminate the gap and restore full employment. 6. Experiment on your own. What conclusions can you draw about the relationship between levels of the components of aggregate expenditure and equilibrium GDP? Answer Adjust any of the sliders to show a net increase in aggregate expenditure and click the Adjust Income button. Equilibrium GDP will increase. Likewise, any change in any or all components of aggregate expenditure which cause net expenditures to fall will cause equilibrium G
