Question

contractionary gap can be controlled by

Answer 1

In order to eliminate this inflationarygap a government may reduce government spending and increase taxes. A decrease in spending by the government will directly decrease aggregate demand curve by reducing government demand for goods and services.

Answer 2

Answer is Expansionary Fiscal Policy.

Contractionary gap or recessionary gap occurs when there is downfall or recession in the economy of the nation. This is the gap between the actual output and potential output of the economy.  Here, actual output is less than the capable output.

To overcome this situation, the Expansionary Fiscal policy can be used.

1. Maximizing the government purchases and expenses

2. Minimizing the taxes.