We discussed three situations where fiscal policy is most likely to matter (though fiscal policy is best when all three are true): 1. When the economy needs a short-run boost 2. When the problem is low AD, not low Solow growth 3. When many machines and workers are unemployed Let’s fit each of the following news stories into one (or more) of the above categories.

a. World War II ends, and millions of U.S.

soldiers return home. (Note: As a matter of history, returning World War II soldiers were overwhelmingly employed by the private sector.)

b. Consumption spending declines dramatically as people fear a recession.

c. Foreigners decide they are unwilling to buy U.S.-made airplanes because of rumors they read on the Internet. mk6