You are the Chief Economic Advisor of the President of Dreamland. Right now the

Question

You are the Chief Economic Advisor of the President of Dreamland. Right now the country has unemployment of 4.0 % . The country has suffered a severe recession few years ago and it is showing some signs of very slow growth lately but lot of people are still out of jobs and have stopped looking for work , federal annual budget deficit is $ 1 trillion a year and a national debt of $20 trillion. Some manufacturing companies are moving out of the country in search of cheap labor and the ones at home are not doing as good and some big ones like auto are trying to cope well after coming out of bankruptcy . The Central Bank has been keeping the interest rate artificially low and the elderly savers are not making any return on their CDs. Dreamland is also facing a huge trade deficit and approaching fiscal cliff . The President wants your smart advice. He wants to turn things around real fast and get the economy back on track with your help to save his party candidates from being defeated in the coming election. !! ( 10 pts. )

a/Advise your President in detail to save your job and get a good grade . ( 7 points , try to answer part by part in detail to get full credit )

b/ What would happen to his attempt to attain a balanced budget ? (1.5 points )

c/ How would the President tell that his economy is approaching equilibrium or getting better ? (1.5 points ) . ( Hint : you have learned different policies during the semester ,try to use them with their pros and cons . Try to be as detailed as you can and try to be consistent and realistic , not just your wild opinion , you have to demonstrate that you have learned a lot from this course )

Explanation / Answer

As per the given information the country is in recovery mode but have a 4% rate of unemployment also federal annual budget deficit is $ 1 trillion a year and a national debt of $20 trillion. The centeral bank is keeping the interest rate low and ederly saves are not making any return on their CDS.

a) It is advisable in such a situation to follow an expansionary fiscal policy, the governemnt should boost the aggregate demand in order to increase jobs as interest rate is low the investment will boost up one the aggregate demand increased also the impact of increase in AD via fiscal policy shows up in long term in terms of inflation in the economy and it is new election it is advisable that government should invest in the economy.

2) As government expenditure will rise the aggregate output in economy will increase due to multiplier effect this will also increase the government tax revenue although the balance budget will not be achieve but this expansionary fiscal policy will help the economy and reduce budget deficit gap as well.

3) A President will be able to tell his economy is reaching equilibrium when there will be more jobs, lower unemploymeny, higher investment and higher per capita income.

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