Section 14 Gandalf wishes the economy of Middle Earth to operate smoothly after he sails from the Grey Havens to the never-ending lands in the West. He gathers King Elessar of Gondor, King Eomer of Rohan, Thain Pippin Took of the Shire, King Thorin III Stonehelm of the Lonely Mountain, King Bard II of Dale, King Thranduil of Mirkwood, Gimli son of Gloin of Aglarond, Prince Faramir of Ithilien, Prince Imrahil of Dol Amroth, Treebeard of Fangorn Forest and other councilors and leaders of the various countries of Middle Earth to instruct them on fiscal policies designed to smooth out the business cycle. a) Describe a budget deficit, a budget surplus and a balanced budget. Include the relationship of tax revenues and government spending. What impact will each have on the market for loanable funds? b) Describe and graph how an income tax affects potential GDP and aggregate supply. Indicate the income tax wedge. (2 graphs) How do taxes on expenditures affect the income tax wedge? c) Draw the Laffer curve. Show where the maximum tax revenues would be. From this point does an increase in tax rates increase or decrease tax revenues? d) Describe the three multipliers for government fiscal policy and describe the differences in size of impact. How does each work to affect the economy? e) Draw expansionary fiscal policy that is applied when the economy is in a recessionary gap using the AD/AS model. What are the two fiscal actions that the government could take to implement this policy? f) Draw contractionary fiscal policy that is applied when the economy is in an inflationary gap using the AD/ AS model? What are the two fiscal actions that the government could take to implement this policy? g) List and briefly describe the five lags that cause problems in implementing fiscal policy