Problem
Governments to get the economy out of recession or cool the economy down when the economy is overheating often use fiscal policy.
• What is fiscal policy?
• How can it be used to get the economy out of recession?
• How can it be used to get the economy out of the situation where the economy is in an expansionary period where we exceed long run potential?
• Do both situations result on different impacts on inflation? Why or why not?
Calculations:
If there a $2billion increase in government spending, other things being equal, what would be the resulting change in aggregate demand, and how much of the change would a change in consumption, if the MPC were the following:
• 1/3?
• 1/2?
• 2/3?
• 3/4?
• 4/5?
See Rubric below
• The economy is experiencing a $225 million inflationary gap. If the government decided to solve this macroeconomic disequilibrium using a change in taxes, would you recommend an increase or decrease in taxes? If the MPC =0.9, what magnitude of tax change would be appropriate?
• The economy is experiencing a recessionary gap of $30 billion. If the MPC=0.75, what government spending stimulus would you recommend to move the economy back to full employment? If the MPC=0.66