. (Fiscal Policy) Explain why effective discretionary fiscal policy requires information about each of the following:

a. The slope of the short-run aggregate supply curve

b. The natural rate of unemployment

c. The size of the spending multiplier

d. The speed with which self-correcting forces operate

This question goes to the heart of the information problems with discretionary policy and hence the basis of arguments made by many economists against "fine-tuning" the economy.

2.(Fiscal Policy with an Expansionary Gap) Using the aggregate demand-aggregate supply model, briefly explain an economy with an expansionary gap. If the government is to close the gap by changing government purchases, should it increase or decrease those purchases? In the long run, what happens to the level of real GDP as a result of government intervention? What happens to the price level? Follow the AD-AS diagram, assuming that the government changes its purchases by exactly the amount necessary to close the gap.