Assume the United States economy has the following:
• GDP is $16,000 billion down from $16,350 billion eight months ago.
• Unemployment is at 7.4% up from 5.7% six months ago.
• Inflation is stable at 1.7%
1. Explain in detail the problem the country is facing.
2. What is the size of the GDP gap?
3. Government could address the problem with either increasing government spending, cutting taxes, or both. If the government decided to increase spending to address the problem, by how much should spending be increased? If the government decided to cut taxes to address the problem, by how much should taxes be cut?
4. Should the government cut taxes or increase spending or some combination of both to address the problem?
5. What could happen to make the policy you recommend in Question 4 ineffective?