Question

fiscal policy

ANSWER 1 IT IS SOLVE ALREADY, PLEASE ANSWER QUESTION 2

1. A government starts off with a total debt of $3.5 billion. In year one, the government runs a deficit of $400 million. In year two, the government runs a deficit of $1 billion. In year three, the government runs a surplus of $200 million. What is the total debt of the government at the end of year three?

1) Total debt was $3.5 billion=$3500 million

In year 1 deficit=$400 million

Therefore after year 1 debt was 3500+400=$3900 million

In year 2 deficit=$1 billion=$1000 million

After year 2 debt was 3900+1000=$4900 million

In year 3 surplus was $200 million

After year 3 debt was 4900-200=$4700 million

2. Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below. Indicate which direction aggregate demand and /or aggregate supply shifts.:
   1. A recession.
   2. A stock market collapse that hurts consumer and business confidence.
   3. Extremely rapid growth of exports.
   4. Rising inflation.
   5. A rise in the natural rate of unemployment.
   6. A rise in oil prices.

Answer 1

(Question 2)

(1) Expansionary fiscal policy

To pull out economy from recession, increase in G or decrease in T is appropriate policy tool to increase aggregate demand. AD curve will shift to right.

(2) Expansionary fiscal policy

A reduction in consumer and business confidence will decrease aggregate demand, so increase in G or decrease in T is appropriate policy tool to increase aggregate demand. AD curve will shift to right.

(3) Contractionary fiscal policy

Rapid export growth will increase net exports and aggregate demand, increasing inflation. To tame inflation, a decrease in G or increase in T is appropriate policy tool to decrease aggregate demand. AD curve will shift to left.

(4) Contractionary fiscal policy

To tame inflation, a decrease in G or increase in T is appropriate policy tool to decrease aggregate demand. AD curve will shift to left.

(5) Expansionary fiscal policy

A rise in natural rate of unemployment is caused by a decrease aggregate demand, so increase in G or decrease in T is appropriate policy tool to increase aggregate demand. AD curve will shift to right.

(6) Expansionary fiscal policy

A rise in oil price will lower aggregate supply, causing higher inflation and lower output (Stagflation), so increase in G or decrease in T is appropriate policy tool to increase aggregate demand and increase output. AD curve will shift to right.