Fiscal Policy and Government Spending

Part 1: Assume that the country is in a period of high unemployment, interest rates are at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year.

• Suggest how fiscal and monetary policy can move those numbers to an acceptable level keeping inflation the same.
• What is the first action you would take as the president? As the chairman of the Fed? Why?
• What would be your subsequent steps?
• Make sure you include both the positive and negative effects of your actions, and include the trade-offs or opportunity costs. 

Include the following concepts in your discussion:

• Demand and supply of money
• Interest rates
• The Phillips curve
• Taxation
• Government spending
• Wages
• Costs of inflation
• The multiplier and the tax multiplier
• The idea of tax rebates to stimulate the economy

Part 2: Assume that the country is in a budget deficit and carrying a very large debt. Discuss the dangers of a high debt to GDP ratio and a growing budget deficit. Would this affect any policy changes you discussed in Part 1?