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Problem Set 3&4
Q 1.a. Recessionary gap is being illustrated in the above figure. There is occurrence of recessionary gap when the actual level of output happens to be less than that of the potential output of the economy.
. In the presence of the expansionary fiscal policy, the government spending rises and there occurs a fall in the level of aggregate demand in the economy. Thus because of this, the aggregate demand has been found to have got shifted to the right from AD to AD1 and thereby causing the economy to reach its level of potential output
