1. Why are federal government actions that increase deficits considered expansionary fiscal policy and those that decrease deficits considered contractionary fiscal policy?

2. Are increases in both government purchases and net taxes at the same time expansionary or contractionary? Would both changes together increase or decrease the federal government deficit?

3. Answer the following questions.

a. If the current budget shows a surplus, what would an increase in government purchases do to it?

b. What would that increase in government purchases do to aggregate demand?

c. When would an increase in government purchases be an appropriate fiscal policy?

4. Answer the following questions.

a. If the current budget shows a deficit, what would an increase in taxes do to it?

b. What would that increase in taxes do to aggregate demand?

c. When would an increase in taxes be an appropriate contractionary fiscal policy?

5. Use the accompanying diagram to answer the following questions.

LRAS SRAS, SRAS Es Ez EA Price Level E1 ADz AD, 0 RGDPNR Real GDP