A recessionary gap happens when a country’s actual GDP is lower in comparison to the nation’s GDP at full employment. An example of the recessionary gap is when the US has a real GDP of $17.95 billion while the potential GDP is $66.86 billion. An inflationary gap occurs due to increased demand for products and services caused by heightened employment levels and elevated trade activities (Oshodi, 2018). The tool fiscal policy tools used by the government are taxes and expenditures. Da Costa’s article discusses the signs that an economy could be going into a recession. The fiscal policy holds that increment or decrement in expenditures and taxes affects inflation, cash flow, and employment concerning the economic system (Arnold, 2019). Government spending, borrowing, and tax can be used by economists to combat inflation. For instance, the government can reduce inflation by increasing taxes and reducing its spending. Such an act enhances the government budget while reducing aggregate demand. In a situation where the economy is growing rapidly, inflationary pressures can be reduced while avoiding a recession (Da Costa, 2021). The federal government relies on fiscal policy tools to accelerate economic growth by slashing taxes and increasing expenditures.
Monetary policy is the central bank’s actions that manipulate monetary and credit quantities in an economy. On the other hand, fiscal policy involves decisions made by the government concerning taxes and expenditures. If the government suspects inadequate business activity within an economy, it can intensify its spending as a stimulus. When the government does not receive taxes that can pay for its spending, it can use deficit spending by issuing debt securities (Da Costa, 2021). The discretionary fiscal policy involves the use of taxation and spending to expand or shrink a country’s economy. Discretionary fiscal policy utilizes two tools; budgeting and tax codes (Rigon & Zanetti, 2018). The government can decide to modify any of the tools to control inflation and avoid a recession.
References
Arnold, R. A. (2019). Economics (13th ed.). Cengage Learning, Inc.
Da Costa P. (2021). The US economy may be facing another recession, new research suggests. Forbes.
Oshodi, B. A. (2018). Analysis of macroeconomic indicators on economic growth: Empirical studies of Nigeria and China. SSRN.
Rigon, M., & Zanetti, F. (2018). Optimal monetary policy and fiscal policy interaction in a non-Ricardian economy. International Journal of Central Banking, 14(3).