Question

1. Using fiscal policy what tools would be used to expand the economy & alleviate the problem of unemployment.
2. Given the size of the public debt in the United States how does it compare with other countries as a percentage of GDP.
3. What approaches can be used to reduce the size of the public debt?

Answer 1

1) To expand the economy, expansionary fiscal policy should be adopted through which we can raise government spending and reduce tax such that people have more disposable income to consume goods.

Aggregate demand = Consumption + Investment + Government spending + Exports - Imports

Rise in government spending and consumption will raise aggregate demand in an economy. Rightward shift in demand curve from AD to AD1 will result in output level rising from Y to Y1 which will reduce unemployment.

Drawback of rightward shift in demand curve will raise inflation rate.

2) This data is with reference to 2018:

Public Debt of US = $19.05 trillion which is 79.2% of GDP

Public Debt of China = $5.48 trillion which is 50.5% of GDP

Public Debt of India = $1.8 trillion which is 68% of GDP

Public Debt of Japan = $11.4 trillion which is 238.20% of GDP

3) Approaches used to reduce public debt:

• Reduce rate of interest to raise investment level.
• Raise tax rate to collect more tax revenue.
• Government spending cuts