Question

1.Outline how counter cyclical fiscal policy and balanced budget fiscal policy would close a recessionary gap. Be specific on goals, how each theory would achieve those goals, how they would close the gap, and potential negative effects.

2.According to monetary policy, explain how the Bank of Canada would react to a recession. Be specific on goals, how they would achieve those goals, how they would close the gap, and potential negative effects.

3.Please describe how the PPC curve represents scarcity, choice and opportunity cost.

4.Discuss the differences calculating GDP using the expenditure approach and income approach. Be specific, do not just write the formula.

Answer 1

Question 1 answered:

A counter-cyclical fiscal policy means a policy or strategy by the government to counter boom or recession through fiscal measures. It works against the ongoing boom or recession trend For recession expansionary policy and during booms contractionary discal policy will be used.

Fiscal policy is a policy controlled by the government and it has two tools: taxes and govt. spending.During recessions govt. decreases taxes and increases govt. spending which is called expansionary fiscal policy. During inflation govt. increases taxes and decreases govt. spending which is called contractionary fiscal policy.

When taxes are low and government spend money then mu,tiplier effect comes into play and then gap between potential and actual employment is closed.

Similarly during booms taxes are increased and spending is reduced which leads to reduced aggregate demand.This also leads to more tax revenue and governemnt is able to have balanced budget.

There is always polcy conflict and less aggregate demand leads to unemployment and government has to spend more money on unemployment benefits. Similarly during booms price levels go up. Government budget also is compromised and money spent could have been spent on more asset building projects and human capital building.