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Question 33 (12 points)
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Suppose that an economy is producing real GDP valued at $15.5 trillion, but the
economy's potential level of production is $18 trillion. First explain what type of
production gap this is and how unemployment will be impacted. Then explain both
how the federal government might use its three fiscal policy tools and how the
Federal Reserve would use its three traditional monetary policy tools.

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azikennamdi

The type of production (or GDP) gap identified is the Negative production Gap. This is a situation where the economic output is less than the full capacity output.

How will the Negative Production Gap impact Unemployment?

A negative Unemployment Gap always translates to low growth and further shortfall in output and increasing rates of unemployment.

Three fiscal policy tools that can be used to tackle this situation are:

  1. Lowering taxes
  2. Increased government spending
  3. Transfer payments.

The above tools are expansionary in nature. They have the effects of stimulating aggregate demand hence causing an expansion in production and reducing unemployment.

The three monetary tools that can be used to combat the above situation are:

  1. Open Market Operations such as buying back government bonds;
  2. Reduced discount rates which increase money supply; and
  3. Reducing reserve ratio are all expansionary. They will increase the money supply and stimulate aggregate demand.

Learn more about Negative Production Gap at:

https://brainly.com/question/25940788


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