Explain the difference between discretionary fiscal policy and the use of automatic stabilizers.

Instructions:

You are the Chief Economic Advisor of Econoland, a country whose economy is currently experiencing a recession. Your job is to advise the President on the current state of the economy in the form of a letter. You should provide a concise explanation of fiscal policy approaches to returning the economy to full employment. Be sure to include the following items in your letter:

Using what you learned this week, identify the main problems the economy is currently experiencing. Use an AD/AS graph to illustrate a recession.

In the context of Aggregate Supply and Demand (AS/AD), Briefly explain what fiscal policy is and how it can resolve a recession. Make sure you clarify which line on the AS/AD graph will move and why.

Insert an AS/AD graph to show how these actions will return the economy to full employment.

Explain the difference between discretionary fiscal policy and the use of automatic stabilizers.

Suggest one specific example of a discretionary fiscal policy that can stabilize this economy. What is at least one problem associated with using a discretionary option rather than an automatic option?

Identify one specific example of an automatic fiscal policy (built-in stabilizer) and explain how it will help to stabilize this economy.

What are the potential negative consequences of using fiscal policy to resolve this recession?

Use what you have learned in this class with your textbook as your primary resource. Your letter should be 3-4 paragraphs long and include two AD/AS graphs.

Prior to writing your letter, complete the Fiscal policy pre work worksheet.

Requirements: Full example

Fiscal Policy Pre-Work Document:

Answer these questions using what you have learned this week and then use that information to write a clear and concise memo to the President of Econoland. Make sure you use complete sentences and create well formed paragraphs to communicate this information in the form of a memo or letter. Do not submit a list of bullets rather than paragraphs or include the listed questions in your response. Your work will be returned to you if you reference the United States any US political figure or party. This is not a political assignment. This is an economic policy assignment designed to assess how well you can apply the concept of fiscal policy in the context of a recession.

Paragraph 1

What happens to Real GDP during a recession?

What happens to Unemployment during a recession?

Draw a recessionary Gap below. You can use one of the recessionary gap images that was included in last week’s sample PowerPoint to cut and paste into your letter so you don’t have to create your own.

Paragraph 2:

What is fiscal policy?

Who is responsible for fiscal policy?

Which line on the AS/AD graph moves when fiscal policy is implemented?

Which direction do you want that line to move to resolve a recession?

Draw a recessionary Gap that is being resolved through the use of fiscal policy below. You can use one of the recessionary gap images that was included in last week’s sample PowerPoint to cut and paste into your letter so you don’t have to create your own.

Paragraph 3:

What is discretionary fiscal policy? Make sure you clarify when the legislation was passed relative to the problems in the economy.

What is an example of discretionary fiscal policy?

Explain briefly why this is an example of a discretionary policy.

Paragraph 4:

What is automatic/non-discretionary fiscal policy? This can also be referred to as a built-in stabilizer? Make sure you clarify when the legislation was passed relative to the problems in the economy.

What is an example of automatic fiscal policy/built in stabilizer?

Explain briefly why this is an example of an automatic policy.

Paragraph 5:

Is expansionary or contractionary fiscal policy used to resolve a recession.

What are the positive results of using this type of fiscal policy when there is a recession? Look at the graph you used in Paragraph 2 for help if you need it.

What are the potential negative consequences of using this type of fiscal policy to resolve a recession? Look at the graph you used in Paragraph 2 for help if you need it.