What kind of economic gap will start to occur

Reference no: EM133408938

Case Study: Suppose the economy of a hypothetical country has reached its long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs.

1. The economy of a hypothetical country has been stable for two or three years with very low unemployment. Wages have been gradually increasing during this time. Now stock market prices begin significant increases, causing peoples' investments, such as their retirement accounts and other investments, to increase in value. People feel very good about the future and use their new-found wealth to buy things that they had been hesitant to purchase in the past.

Questions: Given this scenario, insert your answers below each of the following questions.

a. What kind of economic gap will start to occur (inflationary or recessionary)?

b. What kind of fiscal policy might be helpful to stabilize the economy (expansionary or contractionary)?

c. What specific fiscal policy tools does the government have available and how should these tools be utilized to maximize their effect in stabilizing the economy?

d. How should these tools be utilized to maximize their effect in stabilizing the economy?

e. What would be the likely impact on the government budget and national debt of the use of these fiscal policy tools?

Reference no: EM133408938

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