Question

Suppose the economy had been producing at Natural Real GDP but is now experiencing a recession. Which of the following are discretionary fiscal policies that could bring the economy closer to Natural Real GDP? Check all that apply. In the preceding scenario, is the discretionary fiscal policy needed to bring the economy closer to Natural Real GDP an example of expansionary fiscal policy or contractionary fiscal policy?

Answer 1

Part 1. Additional spending on national park facilities & A tax cut is the answer.

Part 2. Expansionary

Step-by-step explanation:

The Natural level of real GDP is also associated with the natural rate of unemployment. When the real gdp < natural real gdp, the economy is said to be in a recession. Thus unemplyment rate is> natural rate of unemployment.

Reason is as follows:

A tax cut, depends if its permanent or not (to see the difference between short and long run effects). However, for this scenario, a tax cut should give consumers more disposable income, which would increase consumption, thus increasing total output. The opposit effect would happen for a tax increase. Hence a tax cut is a policy that could bring gdp near natural GDP.

A reduction in government purchases would lower G, which would lower Y too. so all else equal, a reduction in government purchases wouldn't help increase output, rather it may fall instead. So this is not a solution for bringing actual gdp near natural GDP.

Additional spending on national park facilities:- Will increase income of someone or the other and thus would create extra demand . Thus it would give some consumers more disposable income, which would help them increase C, thus would be increasing total output. So this is can be a solution for bringing actual gdp near natural GDP.