What fiscal policy would you recommend...?

What fiscal policy would you recommend when (a) the economy begins at potential but foreign economies slow dramatically (b) the economy has been operating above potential output & inflationairy pressures rise (c) a new technology is invented that significantly raises potential output? Thanks!

Answer:
Draw your AS/AD curves to analyze the answers. Recall that fiscal policy directly influences the AD curve.

a) This is a shift leftward of the AD curve (demand from foreign economies falls, decreasing the X component of GDP). Traditional fiscal policy would dictate an expansionary policy to counteract the fall in AD, shifting it back to the right.
b) Draw an AS/AD curve where the equilibrium point is on a near-vertical part of the AS curve--this represents the economy running near potential. How can you bring prices down? A contractionary policy (raise taxes / cut spending) would shift the AD curve back to the left, which will reduce prices with a smaller effect on output (Q).
c) Reflect the new technology and higher potential output by shifting the AS curve to the right. What happens to P and Q when you do so? P falls, Q rises. Does this situation call for any particular fiscal policy? I would say remain neutral.
Generally laissez-faire. However, the government does need to make sure there is a fairly level playing field, and that consumer confidence is maintained on a high level. Anything less, and people could not consume with confidence, anything more and it leads to inefficiencies.
(a) none, let the invisible hand do its job in this case
(b) none, let the Federal Reserve do their monetary policy, fiscal policy often just hurts what the Federal Reserve does
(c) make sure this invention keeps competitions even, but don't do too much because often other companies will increase production to keep up (survival of the fittest), so when really do nothing in this case either

The answers post by the user, for information only, FunQA.com does not guarantee the right.



More Questions and Answers:
  • Homework problem. economics.?
  • The balance budget multiplier is equal to zero?
  • Developing countries and national income?
  • Viewpoint?
  • Given that there's so much debate over the probable effectiveness of economic sanctions....?
  • What if the number of children a family could have were limited by household income?
  • Is there a correlation between poverty and homicide against children?
  • What is the forecast for uranium demand and supply?