The Fiscal Policy Toolkit

This week, I introduced you to Fiscal Policy. Fiscal policy is the way that the government uses spending and tax decisions to influence the economy. This type of policy fits well within the AS/AD framework and can be demonstrated through the impact of government spending and taxation on AD.

This week you will shift roles from student to teacher. You will create an exam question related to fiscal policy that includes a scenario of a disruption to the economy and a proposed resolution using fiscal policy. You will provide both your exam question and the correct response on the same document.

Assignment Requirements

Please be sure to include as part of your question:

1. What caused the economy to deviate from potential income. Use one of the AD shift factors we discussed in lecture.

2. Where the economy is as a result of that deviation (recessionary or inflationary gap).

Please be sure to include as part of your response:

1. What fiscal policy can lead the economy back towards potential.

2. Before and after graphs of AS/AD reflecting the initial change from LR equilibrium and the impact of fiscal policy.

Submission Details

Your question and answer will be submitted online in one document.

Let me know if you have any questions.