Questions: 1. The economy is in a recessionary gap What are the fiscal policy options available to the government?
2. Suppose that real GDP is $1,300 and potential GDP is $1,800, while the marginal propensity to consume is 0.6. If the government is going to engage in government spending and imposes no taxes, what specific fiscal policy action should policy makers take?
3. Most economists do not support a law that requires the federal budget to be balanced every year. Explain why
4. What is the goal of expansionary monetary policy, and how does it work in the short run?
5. Suppose the annual inflation rate is at 2%, and 8.5% of the labor force is unemployed. If you were on the Federal Reserve's Open Market Committee, what action would you prescribe? How would this affect the economy, the inflation rate, and the unemployment rate?