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 an aggressive policy of increasing...

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 an aggressive policy of increasing tariffs on foreign goods imported into the country results in retaliatory actions from the other countries against the hypothetical country’s products and services. This causes great loss of business in the hypothetical country, and results in significant unemployment. Include detailed answers to the following questions:

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

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

3. 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?