Fiscal policy measures for economy operating

Reference no: EM1315260

You are an aide working for a policy maker (like a Senator Marilyn Pugh in the U.S.) in your country. You have been asked to analyze the economy, determine if there are any problems, and to make policy recommendations. You are to report to the policy maker in a policy paper. Your group leader will be responsible for entering the group paper in the document area. (You may select your own group leader.) You have gathered information statistics about the economy and this is what you have found.

Population= 300 million
Labour Force= 160 million
Unemployed= 12 million
Structural Unemployment rate= 2%
Frictional Unemployment rate= 3%
GDP Deflator 2007= 170
GDP Deflator 2008= 176.8 (The GDP deflator is the price index for the entire economy.)
Full Employment Real GDP= $6,000 billion
Equilibrium Real GDP= $5,880 billion
MPC= .75

1. What is the problem with the economy? Back your answer up with statistics. (You will not get very many points for merely identifying the problem. The real points come from substantiating your answer).

2. What are two possible fiscal policy solutions for the problem? Using a Keynesian approach, you should be able to get numerical solutions. More points are given for numerical solutions.

3. What cautions should you give the policy maker about these potential solutions? (In other words are there some undesirable side-effects?)

Reference no: EM1315260

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