Question

Draw a budget balance graph for the economy from question (1). If the government used fiscal policy to fix a recessionary gap, would the BB increase or decrease? Is there a direct or indirect relationship between G and public debt?

Answer 1

If the government used fiscal policy to fix a recessionary gap, the budget balance graph would increase. There is an indirect relationship between government spending (G) and public debt.

Step-by-step explanation:

A budget balance graph shows the relationship between government spending and revenue. If the government used fiscal policy to fix a recessionary gap, the budget balance (BB) would increase, meaning that government revenue would be greater than its spending. This is because the government would either reduce spending or increase taxes to close the recessionary gap.

There is an indirect relationship between government spending (G) and public debt. When the government increases spending, it may need to borrow more money to finance its expenses, leading to an increase in public debt. However, a decrease in government spending can reduce the need for borrowing and potentially lower public debt.