Suppose the economy of a hypothetical country has reached its long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. The economy of a hypothetical country has...

Suppose the economy of a hypothetical country has reached its long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs.

1. The economy of a hypothetical country has been stable for two or three years with very low unemployment. Wages have been gradually increasing during this time. Now stock market prices begin significant increases, causing peoples’ investments, such as their retirement accounts and other investments, to increase in value. People feel very good about the future and use their new-found wealth to buy things that they had been hesitant to purchase in the past. Describe, in a short essay inserted below these questions, how the economic situation will change and how the government could best respond to these changes. Include detailed answers to the following questions in your essay:


2. What kind of economic gap will start to occur (inflationary or recessionary)?


3. What kind of fiscal policy might be helpful to stabilize the economy (expansionary or contractionary)?


4. What specific fiscal policy tools does the government have available, and how should these tools be utilized to maximize their effect in stabilizing the economy?


5. What would be the likely impact on the government budget and national debt of the use of these fiscal policy tools?