Governments to get the economy out of recession or cool the economy down when the economy is overheating often use fiscal policy.

1. What is fiscal policy?

2. How can it be used to get the economy out of recession?

3. How can it be used to get the economy out of the situation where the economy is in an expansionary period where we exceed long run potential?

4. Do both situations result on different impacts on inflation?Why or why not?

Calculations:

1. If there a $2billion increase in government spending, other things being equal, what would be the resulting change in aggregate demand, and how much of the change would a change in consumption, if the MPC were the following:
2. 1/3?
3. 1/2?
4. 2/3?
5. 3/4?
6. 4/5?

2.The economy is experiencing a $225 million inflationary gap. If the government decided to solve this macroeconomic disequilibrium using a change in taxes, would you recommend an increase or decrease in taxes? If the MPC =0.9, what magnitude of tax change would be appropriate?

3.The economy is experiencing a recessionary gap of $30 billion. If the MPC=0.75, what government spending stimulus would you recommend to move the economy back to full employment? If the MPC=0.66