1. Give some examples of changes in federal spending and taxes by the government that would be fiscal policy and some that would not.
2. A government starts off with a total debt of $3.5 billion. In year one, the government runs a deficit of $400 million. In year two, the government runs a deficit of $1 billion. In year three, the government runs a surplus of $200 million. What is the total debt of the government at the end of each of the three years?
3. Excise taxes on tobacco and alcohol as well as state sales taxes are often criticized for being regressive. Although everyone pays the same rate regardless of income, why might this be so?
4. In a booming economy, is the federal government more likely to run surpluses or deficits? What are the various factors at play?
5. Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below and sketch a diagram using aggregate demand and aggregate supply curves to illustrate your answer:
   1. A recession.
   2. A stock market collapse that hurts consumer and business confidence.
   3. Extremely rapid growth of exports.
   4. Rising inflation.
   5. A rise in the natural rate of unemployment.
   6. A rise in oil prices.

For problem 8 be sure and show the dollar amount of the National Debt at the end of Year 1, the end of Year 2, and the end of Year 3.

For problem 25 will be drawing 6 ADAS diagrams and make a note of whether Expansionary Fiscal Policy or Contractionary Fiscal Policy is the appropriate approach to the current situation. Your ADAS diagram will not have numbering on the X and Y axis and should look similar to Figure 10.13 and 10.14 in the book. The graph should show a situation where the economy is either below or beyond Yp or Potential GDP. There is one situation on the list that may not call for either expansionary or contractionary policy.

LRAS SRAS, Price Level ED AD Real GDP Figure 10.13 Expansionary Fiscal Policy. The original equilibrium (EO) represents a recession, occurring at a quantity of output (YO) below potential GDP. However, a shift of aggregate demand from ADO to ADI, enacted through an expansionary fiscal policy, can move the economy to a new equilibrium output of El at the level of potential GDP which the LRAS curve shows. Since the economy was originally producing below potential GDP, any inflationary increase in the price level from PO to Pl that results should be relatively small.LRAS SRAS ED Price Level E. AD AD Real GDP Figure 10.14 A Contractionary Fiscal Policy. The economy starts at the equilibrium quantity of output YO, which is above potential GDP. The extremely high level of aggregate demand will generate inflationary increases in the price level. A contractionary fiscal policy can shift aggregate demand down from ADO to ADI, leading to a new equilibrium output El, which occurs at potential GDP, where ADI intersects the LRAS curve