- How could the existence of unemployment benefits or other transfer programs reduce the
severity of an economic contraction?
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2a. Given that the economy has moved from A to B what would be the appropriate
fiscal policy to achieve potential GDP and why?
2b. If fiscal policy is successful at moving the economy from point B to equilibrium at
potential GDP, which of the following will occur and why?
- Identify each of the following as (i) part of an expansionary fiscal policy, (ii) part of a
contractionary fiscal policy, or (iii) not part of fiscal policy.
3a. The personal income tax rate is lowered.
3b. The government increases spending on defence due to a change in spending
priorities.
3c. The company income tax rate is lowered.
3d. The State of New South Wales builds a new tollway in an attempt to expand
employment and ease traffic congestion.
- Using the following table, answer the following questions. The numbers in the table are in
billions of dollars.
Real GDP Consumption Planned
Investment
Government
Purchases
500 400 100 150 -50
600 450 100 150 -50
700 500 100 150 -50
800 550 100 150 -50
4a. What is the equilibrium level of real GDP?
4b. What is the MPC?
Net Exports
4c. If investment spending declines by 50, what will happen to equilibrium GDP?
- Suppose the current equilibrium GDP for a country is $14.5 trillion and potential GDP is
$14.3 trillion. Will decreasing government purchases by $200 billion or raising taxes by
$200 billion restore the economy to potential GDP? Briefly explain why.
