Question

Congratulations! You have been appointed an economic policy advisor to the United States. You are told that the economy is significantly below its potential output and that the following will happen next year: World income will fall significantly and the price of oil will fall significantly due to lack of economic activities, as well as the availability of alternative and more sustainable energy sources (wind, solar, hydro, nuclear), and the U.S. is an oil exporter. What kind of policies (under Fiscal policy) might you suggest to the government? Mention three. Consider the economic principle held by Classical economists: The economy always returns to its potential in the long run. What are Keynes’s criticisms of this economic principle?

Answer 1

Fiscal policy:under expansionary fiscal policy

1) taxation cut 2) expenditure increase on welfare through health program,education ,rtc 3) subsidy on food ,health , agriculture inputs , electricity.

Yes during trade cycle there is boom and burst period . During boom period in Long run economy may achieve full employment gdp growth as a result of full potential output, but for this demand increment is necessary by measure of expansion fiscal policy .

But according to Keynesian it may be harmful as it will increase fiscal deficit as well as it may decrease countries sovereign credit rating and thus may be reflect in lower foreign investment. This also increase inflation above limit according to Keynesian.