Question

What fiscal policy actions would you recommend in the following instances?a. The economy begins at potential output, but foreign economies slow dramatically.b. The economy has been operating above potential output and inflationary pressures rise.c A new technology is invented that significantly raises potential output-

Answer 1

Answer:(a) INCREASE SPENDING AND REDUCE TAXES

(b) DECREASE SPENDING AND INCREASE TAXES

(c) INCREASE SPENDING AND REDUCE TAXES.

Explanation: EXPANSIONARY FISCAL POLICY is a policy put in place by managers of the economy to expand or increase the income of its citizens,this is meant to give them a good purchasing power by increasing their NET INCOME.

CONTRACTIONARY FISCAL POLICY is a policy put in place to help to INFLATION,this is implemented When the economy is operating above POTENTIAL OUTPUT. This policy will reduce the purchasing power of the people hence the produces will be forced to bring down prices as the Demand for goods and services reduce.