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How to close output gap

Hey, this might seem like a stupid question, but how do you close the output gap? How would monetary and fiscal stimulus close the output gap?

Thanks!

Reply 1

gr8wizard10

Anything to shift out the Aggregate Demand.

So Expansionary policies such as:

- Lower Interest Rates
- Quantitative easing
- Corporate tax incentives
- Subsidise firms to employ workers

Reply 2

MaxLikesNoodles

To close a positive output gap a country would go through contractionary policy as they would want to reduce rampant inflation by reducing AD:
FISCAL - Taxation (income, corporation etc) would Exceed Government Spending
MONETARY - Increase in Interest Rates
SUPPLY SIDE - Long Term investment projects would potentially be put in place in order to shift the LRAS rightwards which would help reduce the positive output gap and lower inflation. However this will most likely not be used as a main strategy as it will take too long to implement and the effects of inflation and such need to be dealt with in the short run

To close a negative output gap it would be the opposite, expansionary for example
FISCAL - Less tax more spending to boost AD (AD=C+I+G+(X-M) )
MONETARY - Low interest rates to make saving less attractive, quantative easing/funding for lending schemes etc
SUPPLY SIDE - Similar long term investment projects/ subsidies etc