1. During an economic contraction, why is it likely that the federal government budget will move into deficit?
2. 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.
3. Explain what happens to inflation and unemployment during the business cycle.