A Fiscal Policy Problem Set Assignment

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Question description

Solve each of the following problems as a way of testing the degree that you have understood the material covered in this module.

  1. One of the dangers of using expansionary fiscal policy is that it can cause inflation. Under what macroeconomic circumstances is an expansionary fiscal policy likely to do this? Use annotated sketch graphs to answer this question. (3)
  2. Use annotated AD/AS graphs to predict the impact of each of the following fiscal policies on equilibrium output (GDP) and price level. (6)
    1. an increase in G with no change in T when the economy is in recession
    2. an increase in T with no change in G when the economy is suffering inflation
    3. increases in both G and T when the economy is in recession
  3. A decrease in government purchases (G) of $8 billion leads to an initial decrease in withdrawals of $4.4 billion.(6)
    1. Find the values of the MPW, MPC, and M in this economy.
    2. State the direction and size of the shift in the AD curve.
    3. Draw a graph to illustrate the policy’s likely effects, given a starting equilibrium price level and output of 130 and $650 billion.

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