If the economy starts in long-run equilibrium, a permanent fiscal ...

[karen]

If the economy starts in long-run equilibrium, a permanent fiscal expansion will cause
 
  A) an increase in exchange rate, E.
  B) a decrease in exchange rate, E.
  C) an increase in output, Y.
  D) a decrease in output, Y.
  E) shifting of the AA curve up and to the right.

Question 2

Explain and give some examples of governmental policy problems.
 
  What will be an ideal response?

[mmpiza]

Answer to Question 1

B

Answer to Question 2

Steady nominal prices give government the power to raise output when it is low. It can also cause them to create a tool that can be used for an economic boom. An example is just before an election. The temptation can be a problem when workers and companies expect it in advance. This will cause a rise in wage demand and prices in the expected expansionary policies. An inflation bias causing high inflation but no average gains in output is also a problem. Others are the difficulty in showing the sources or time of economic changes, and time lags in implementing policies. Impact on the government budget by fiscal policy also causes problems by the way of a tax cut; increase in spending may lead to a government budget deficit that must sooner or later be closed by a fiscal reversal. Policy problem that seem to act quickly have actually a lag time with varying lengths.

[karen]

Excellent

[scottmt]

TYSM