What are the fiscal policy instruments

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Reference no: EM131380811

Explain what fiscal policy is and how it works.

a. What are the fiscal policy instruments? What are the fiscal policy types?

b. Do you agree with the following statement: “Even if the Congress does not pass anynew laws to stimulate the economy, the fiscal policy is still facilitating the economicrecovery?”. Explain what this statement implies. Use the appropriate terms to describethe mechanics of the fiscal policy in this situation.

c. Currently the economy is facing an inflationary gap and the government is extremelyconcerned with the rapidly raising prices.

i. Draw an AD-AS model showing this gap (actual real GDP is $670 billion,potential output is $650 billion).

ii. MPC in this economy is 0.6. What instrument should the government use to closethis gap? Calculate all appropriate multipliers. Calculate, explain, and comparethe effect of each instrument on the budget balance.

Reference no: EM131380811

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