1. Fiscal policy is the practice of changing taxes or government spending with the goals of keeping the economy near full employment and keeping inflation relatively low.

A. Fiscal policy may be expansionary. What specific changes constitute expansionary fiscal policy? Show, on an AD/AS diagram, an economy in which expansionary fiscal policy would be appropriate and the effect of expansionary fiscal policy on that economy. Include detailed graph (with labels) and explanation

B. Fiscal policy may also be contractionary. What specific changes constitute contractionary fiscal policy? Show, on an AD/AS diagram, an economy in which contractionary fiscal policy would be appropriate and the effect of contractionary fiscal policy on the economy. Include detailed graph (with labels) and explanation

C. One problem with fiscal policy is that there can be a long lag time from the time a change occurs in the economy to when it's detected and addressed and then to when the response has an effect on the economy. Show what will happen if the government uses some fiscal policy to respond to the high unemployment rate but, due to the lags, does so only after the economy has returned to long-run equilibrium on its own. Be sure to show both the short-run and long-run effects of the fiscal policy. Include detailed graph with labels and explanation

Answer rating: 100% (QA)

A Expansionary fiscal policy The goal of expansionary fiscal policy is to close a recessionary gap stimulate the economy and decrease the unemployment rate Expansionary fiscal policy is often supporte... View the full answer