Expansionary Fiscal Policy Can Close a Recessionary GapAt E1 the economy is in short-run macroeconomic equilibrium where the aggregate demand curve, AD1, intersects the SRAS curve. At E1, there is a recessionary gap of YP − Y1. An expansionary fiscal policy—an increase in government purchases of goods and services, a reduction in taxes, or an increase in government transfers—shifts the aggregate demand curve rightward. It can close the recessionary gap by shifting AD1 to AD2, moving the economy to a new short-run macroeconomic equilibrium, E2, which is also a long-run macroeconomic equilibrium.