Introduction to the American Economy

Assignment #7: Fiscal Policy

Assume that you have an economy that is in the early months of a recession. Unemployment is 7.2% and rising. Inflation is at 1.2% and relatively stable at the level. The GDP is at $13.6 trillion down from $14.4 trillion six months ago. Assume that you are on the Council of Economic Advisors which is the group that advises the President on economic policy issues. It's your job to propose an Expansionary Fiscal Policy to help alleviate the problems associated with the recession. The NRU is 4% and the target inflation rate is 2.0%

1.Start with a policy based on Government Expenditures. Develop a policy that will help get the economy out of the recession using only changes in government purchases of goods and services. You don't need to get into changes in specific programs but you do need to explain whether the spending should increase, decrease or stay the same. Be sure to explain why the policy will be successful.

2.Next consider a policy based on Taxes. Develop a policy that will help get the economy out of the recession using only changes in taxes. You don't need to get into changes in specific types of taxes but you do need to explain whether taxes should increase, decrease or stay the same. Be sure to explain why the policy will be successful.

3.You have proposed two policy options in questions 1 and 2. Which would you recommend to the President? Explain why you would choose one over the other or why a combination might be best. Finally explain whether the solution you just recommended in the first part of this question is more Keynesian or Supply Side.