Impact of inflationary and recessionary gaps and lump-sum tax on domestic economy

Questions
1

Contents
Contents...........................................................................................................................................2
1. Impact of inflationary and recessionary gaps and lump-sum tax on domestic economy:..3
2..............................................................................................................................................3
3. Difference between actual and cyclical budget deficits:....................................................4
4. Discussion and evaluation of criticisms of fiscal policy....................................................4
1. Applying fiscal policy, what tools would be used to expand economy and alleviate problem
of unemployment:...................................................................................................................4
2. Size of public debt in US how does this compare with other nations as a percentage of GDP
................................................................................................................................................5
2. Graph difference between inflationary and recessionary gaps:..........................................5
3. Difference between discretionary versus nondiscretionary fiscal policy:..........................5
4. List of timing problems of fiscal policy:............................................................................6
5. List and explain false concerns about public debt:.............................................................6
6..............................................................................................................................................6
7. Composition of US public debt related to domestic and foreign holdings:.......................7
2

TASK 1
1. Impact of inflationary and recessionary gaps and lump-sum tax on domestic economy:
In Keynesian cross graph, if the net spending line crosses 45-degree line at level of future
GDP, economy is in good condition. There's no recession, as well as unemployment is at natural
rate i.e. call full employment. However, there is no assurance that equilibrium will be struck
at potential gross Domestic product output level. Equilibrium may be greater or lesser. Inflation
gap can be viewed not as literal estimate of how high actual GDP is going to be, although
as statement about how much additional gross spending in economy increases what is expected
to achieve possible Gross domestic product. Inflationary gap means that, since economy cannot
produce sufficient products and services could sustain this amount of gross consumption,
spending would instead trigger inflationary price rises. Thus, even though shifts in price level
don't occur directly in Keynesian cross-equation, notion of inflation becomes implicit
in definition of an inflationary gap (Teece, 2019).
2.
a, b. At the $380 billion level of GDP, saving = $24 billion and planned investment = $16 billion
(from the question). This deficiency of $8 billion of planned investment causes an unplanned $8
billion increase in inventories. Actual investment is $24 billion (= $16 billion of planned
investment plus $8 billion of unplanned inventory investment), matching the $24 billion of actual
saving.
c, d. At the $300 billion level of GDP, saving = $8 billion and planned investment = $16 billion
(from the question). This excess of $8 billion of planned investment causes an unplanned $8
billion decline in inventories. Actual investment is $8 billion (= $16 billion of planned
investment minus $8 billion of unplanned inventory disinvestment), matching the actual of $8
billion. When saving is greater than planned investment, unplanned investments in inventories
occur and inventories rise, as at the $380 billion level of GDP. As inventories rise, businesses
revise their production plans downward and GDP falls. (Inventories will fall as the economy
moves toward equilibrium.) When planned investment exceeds saving, unplanned disinvestments
in inventories occur and inventories fall, as at the $300 billion level of GDP. As inventories fall,
businesses revise their production plans upward and GDP rises. Equilibrium GDP—in this case,
$340 billion—occurs where planned investment equals saving.
3