Suppose That Real Gdp Has Been Above Potential Gdp for Some
Suppose that real GDP has been above potential GDP for some period of time. The government is considering a reduction in spending, and the Federal Reserve is trying to determine what is likely to happen to inflation. Trace out two possible scenarios that could occur as a result of decreased government spending. Be sure to comment on the long-run inflation level in each case.
Suppose the budget deficit for a hypothetical economy fell from $107 billion in 1996 to $40 billion in 1997.
(A)If the economy was undergoing an economic expansion for 1997, explain how this might account for at least part of the decrease in the budget deficit.
(B)Suppose real GDP equaled potential GDP in 1997 and was below potential GDP in 1996. Sketch a diagram that shows the responsiveness of the deficit to real GDP and also shows the structural deficit.
Suppose as a professional economist you are asked to take part in a debate about the wisdom of pursuing discretionary fiscal policy versus relying on automatic stabilizers. Outline some of the pros and cons for each side of the debate.
Suppose the government surplus is currently .5 percent of real GDP and the structural surplus is 1.5 percent.
(A)Is real GDP currently above or below potential GDP? Draw a diagram showing this situation.
(B)In your diagram, show the situation in which real GDP increases. What happens to the cyclical surplus?