Analyzing expansionary fiscal policy actions in short run and long run.
Based on a prognosis regarding the continuing increase in the Danish level of unemployment in 2003 - 2004, the government considers the use of an expansionary policy.
Some claims that an expansionary fiscal policy in the form of either:
1.A increase in government spending for the year 2004 - 2005 or
2.A temporary tax cut (the tax is reduced by 1 % in 2004 and 2005).
The main argument is that these actions will increase aggregate demand in Denmark right away. Others claim that a more appropriate action would be to lower the interest rate to stimulate private investments.
By utilizing the relevant models and based on the fact that Denmark has a fixed exchange rate regime, the following questions are to be answered:
1.Account for the effect of the two proposed fiscal policy actions in the short run and long run. This includes a description of the consequences of relevant macroeconomic variables such as the production level, unemployment, the current account, the government budget, the inflation rate and the interest rate level.
2. Elucidate account for the possibility of success by carrying out the alternative suggestion regarding lowering the Danish interest rate level.