The budget is the difference between revenues and expenses. For the government, the revenues are relative...

The budget is the difference between revenues and expenses. For the government, the revenues are relative to the Gross Domestic Product (GDP) and expenses are defined as the government’s expenditure (G). Having that in mind, assume the following shock in the economy:

Due to poor working conditions, workers are leaving the labor force and retire.

a) Explain the consequences of the above shock on inflation and GDP by using the AS/AD model (draw the graph, label the axis, show the direction of shifts and present a brief written explanation).
b) If the government does NOT conduct fiscal policy to interfere in the short-run, what will be the effect on the structural budget balance in the long-run? Does it improve or worsen? Explain.
c) Explain intuitively the importance of the structural budget balance.

Expert Solution

Rahul Sunny answered 2 years ago

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