- Explain the effects of the following actions on equilibrium income (Assume that the marginal propensity to consume is 0.8).
a. Government purchases rise by $10 billion.
b. Taxes fall by $10 billion.
- Explain how fiscal policy can be used to close the (a) contractionary gap and (b) inflationary gap.
- Why does a larger government budget deficit increase the magnitude of the crowding-out effect?
- When an economy is already at full employment, what is the outcome of expansionary fiscal policies to employment, inflation, real output, and deficits (assuming no changes in tax rates)?
- How serious is the national debt to our economic stability?
- What is the common method of financing budget deficit?
Sample Solution
