Question

1. What is the difference between the budget deficit and the national debt?

2. Of the two policy - monetary and fiscal; which would be a faster policy to implement to correct a macroeconomic disequilibrium and why .

3. If the Fed pursues expansionary monetary policy, what happen to money supply, interest rates and real GDP?

4. In order to reduce inflationary pressure on the economy, what fiscal policy can the government use? For example, the current economy is producing 100 and the natural rate is 60 and the MPS is .5?

Answer 1

1.Budget decifit is the difference between a government's expenditure and it's revenue receipts.

National debt is government's borrowing to cover budget deficit.

2.Monetary policy is faster.Fiscal policy consists of time lags and the adjustment is not direct,because of the different channels through which fiscal policy is implemented.

3.In case of expansionary monetary policy,the money supply rises,causing LM curve to shift to the right, reducing interest rate and increasing real GDP.

4.The government should follow contractionary fiscal policy.Contractionary fiscal policy reduces aggregate demand and reduces price level as well as output.

MPS=.5

Mutliplier=1/MPS=1/.5=2

The government wants to reduce the real GDP by 40 billions{100-60=40}

Change in spending=x

40=k*x

40=2*x

x=40/2=20

Government needs to reduce its spending by 20 billions.