Fiscal Policy:

a. Consider the case from where consumer wealth falls when the economy is at full employment. What is the appropriate fiscal policy to address this situation? What is the expected outcome?

b. Suppose the marginal propensity to consume is 0.5. If the government decreased spending on goods and services (G) by $100m, all else equal, how would that affect output? Briefly explain why (i.e., explain the multiplier effect).

c. Consider the case for fiscal policy as a response to a fall in GDP below full employment levels. What trade-offs must be made to use fiscal policy to address a recession?

d. In January 2020, the economy was likely at full employment. In May 2020 the economy was clearly below full employment. At the end of March 2020, the Federal government sent checks up to $1200 to people who made under $100,000. Suppose the payments were made when the economy was at full employment. Assuming all else equal, briefly explain what effect would this have on GDP and price levels? Months later, the economy is no longer at full employment, how does your answer change? Explain.