Examine how fiscal policy is used to mitigate negative impacts on the national economy.

This assessment deals with how the government utilizes fiscal policy instruments (tools) to stabilize the economy and to achieve full employment, control inflation, and encourage economic growth.

Suppose the economy of a hypothetical country has reached its long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs.

1. The economy of a hypothetical country has been stable for two or three years with very low unemployment. Wages have been gradually increasing during this time. Now stock market prices begin significant increases, causing peoples' investments, such as their retirement accounts and other investments, to increase in value. People feel very good about the future and use their new-found wealth to buy things that they had been hesitant to purchase in the past. Describe, in a short essay inserted below these questions, how the economic situation will change and how the government could best respond to these changes. Include detailed answers to the following questions in your essay:

a. What kind of economic gap will start to occur (inflationary or recessionary)?

b. What kind of fiscal policy might be helpful to stabilize the economy (expansionary or contractionary)?

c. What specific fiscal policy tools does the government have available, and how should these tools be utilized to maximize their effect in stabilizing the economy?

d. What would be the likely impact on the government budget and national debt of the use of these fiscal policy tools?

2.The economy of a hypothetical country has been stable for two or three years with very low unemployment. Wages have been gradually increasing during this time. Now an aggressive policy of increasing tariffs on foreign goods imported into the country results in retaliatory actions from the other countries against the hypothetical country's products and services. This causes great loss of business in the hypothetical country, and results in significant unemployment. Describe, in a short essay inserted below these questions, how the economic situation will change, and how the government could best respond to these changes. Include detailed answers to the following questions in your essay:

a. What kind of economic gap will start to occur (inflationary or recessionary)?

b. What kind of fiscal policy might be helpful to stabilize the economy (expansionary or contractionary)?

c. What specific fiscal policy tools does the government have available, and how should these tools be utilized to maximize their effect in stabilizing the economy?

d. What would be the likely impact on the government budget and national debt of the use of these fiscal policy tools?

3.Assume that in a hypothetical country, coal mining is a significant industry, hiring a high proportion of that country's workforce. Describe, in a short essay inserted below this question, how a significant decline in coal mining, as the country attempts to switch to environmentally safer production, can ripple through the entire economy, and how the government can use fiscal policy tools to combat such negative effects.