Suppose that the U.S. economy is operating below full-employment equilibrium due to the recessionary gap with high rate of unemployment, and the equilibrium point between AD and SRAS occurs below potential real GDP (See Figure 2). Cognizant of the government plan, answer the following questions on the use of fiscal policy tools during the recessionary gap.
a) What is the type of fiscal policy the government uses to close the recessionary gap in order to produce at the potential real GDP and reduce the high unemployment rate?
b) What are the two fiscal policy instruments available to the policymakers in this respect? Explain.
c) What are the impacts of such policy measures on the AD curve, real GDP and the employment level? Analyze the impact of each fiscal policy tool on the macroeconomic variables.
d) What are the effects of the fiscal policy instruments designed to fight recessions on the Federal Budget and the national debt? Evaluate the influence of each of the fiscal policy tools.
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