Fiscal Policy and Government spending

Posted: July 31st, 2013

Part 1: Assume that the country is in a period of high unemployment, interest rates are at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year. Suggest how fiscal and monetary policy can move those numbers to an acceptable level keeping inflation the same. What is the first action you would take as the president? As the chairman of the Fed? Why? What would be your subsequent steps? Make sure you include both the positive and negative effects of your actions and include the trade-offs or opportunity costs.

Include the following concepts in your discussion:

•Demand and supply of money
•Income and Productivity
•Interest rates
•The Phillips curve
•Taxation
•Government spending
•Wages
•Aggregate supply
•Aggregate demand
•Long run and short run
•Costs of inflation
•The multiplier and the tax multiplier
•An open vs. a closed economy
•The idea of tax rebates to stimulate the economy
Part 2: Assume the country is in a budget deficit and carrying a very large debt. Discuss the dangers of a high debt to GDP ratio and a growing budget deficit. Would this change any policy changes you discussed in Part 1?