In Chapter 11 of the lectures, we learn that a recessionary gap is not good for the economy because it leads to higher unemployment rate in the country.
Likewise, expansionary gap is not good for the economy either because it leads to higher price level or inflation. The government can use fiscal policies
to combat them.
1. Assume the economy is currently experiencing a recessionary gap.
a. How should the government use (increase or decrease) the 3 tools of discretionary fiscal policy to close this gap? (0.3 point)
b. What will happen to AD, AD curve, aggregate output (real GDP), and the price level when the above policies are used? Explain? (0.6 point)
2. Assume the economy has a $1.2 trillion of expansionary gap and the government decide to change G in order to close this gap
a. By how much should G change if MPC = 0.9? Show your work. (0.3 point)
b. Provide an example of fiscal policy used by the government from RECENT news (you must include in-text citation of source where you got the
example from). Which one of the three fiscal policy tools is it? Explain. (0.5 point)