Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for each scenario, compute the size of the tax cut that would achieve this same effect. Policy Options for Closing Output Gap Increase in Spending Tax Cut Spending Multiplier Tax Multiplier (Billions of dollars) (Billions of dollars) Economist A 8 4 Economist B 4 2 Economist C favors increases in government spending over tax cuts. This means that Economist C likely believes that: O Government purchases increase aggregate demand by stimulating investment. O Part of a dollar in tax cuts may be saved rather than spent and thus does not fully contribute to aggregate demand. Economist D argues that it is not possible to move the economy out of recession by increasing government spending. Which of the following statements is consistent with Economist D's belief? O A rise in government spending does not crowd out private sector spending. O A rise in government spending completely crowds out private sector spending.

What is the main advantage of automatic stabilizers over discretionary fiscal policy?

What is the main reason for employing expansionary fiscal policy during a recession?

What is the main reason for employing contractionary fiscal policy in a time of strong economic growth?

What would happen if expansionary fiscal policy was implemented in a recession but, due to lag, did not actually take effect until after the economy was back to potential GDP?

What would happen if contractionary fiscal policy were implemented during an economic boom but, due to Lag, it did not take effect until the economy slipped into recession?

Assume there is no discretionary increase in government spending. Explain how an improving economy will affect the budget balance and, in turn, investment and the trade balance.

Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below and sketch a diagram using aggregate demand and aggregate supply curves to illustrate your answer: A recession. A stock market collapse that hurts consumer and business confidence. Extremely rapid growth of exports. Rising inflation. A rise in the natural rate of unemployment. A rise in oil prices.

What is the difference between discretionary fiscal policy and automatic stabilizers?

What are some of the ways fiscal policy might encourage economic growth?