1. In which of the following circumstances is expansionary fiscal policy more likely to lead to a short-run increase in investment? Explain.

a. When the investment accelerator is large or when it is small?

b. When the interest sensitivity of investment is large or when it is small?

2. For various reasons, fiscal policy changes automatically when output and employment fluctuate.

a. Explain why tax revenue changes when the economy goes into a recession.

b. Explain why government spending changes when the economy goes into a recession.

c. If the government were to operate under a strict balanced-budget rule, what would it have to do in a recession? Would that make the recession more or less severe?