1.During the third quarter of 1997, Japanese GDP was falling at rate of over 11 percentage. Many blame the big increase in Japan's taxes in the spring of 1997, which was designed to balance the budget. Explain how an increase of taxes with the economic growing slowly could precipitate a recession. If you were head of the Japanese central bank how would you respond? What impact would your policy have on the level of investment?

2.By late summer 2010, the target federal funds rate was between zero and 0.25 percent. at the same time, "animal spirits" were dormant and there was excess capacity in most industries. That is, business was in no mood to build new a plant and equipment because many were not using their already existing capital. Interest rates were at or near zero and yet investment demand remained quite low. The unemployment rate was 9.6 percent in August 2010. These conditions suggest that monetary policy is likely to be a more effective tool to promote expansion than fiscal policy. Do you agree or disagree? Explain your answer.

3. Explain why stabilization policy may be difficult to carry out. How is it? possible that stabilization polices policies can be destabilization.

4. Explain why the government deficit rises as the economy contracts and why the government deficit falls when the economy expands.