1. Suppose the economy has fallen into a recession (output level ?0), and the federal government wants to return the economy to its original level of output (?). Respond to each of the following questions using appropriate diagrams and explanations. (a) If policy makers can only use fiscal tools, what should they do? (b) If policy makers can only use monetary tools, what should they do?  (c) What should they do if they want to return output to its original level but keep investment from changing?

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A:

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Fiscal Policy and Money Market

Fiscal policy is one of the important tools that is used by the government to control inflation or aggregate demand in the economy. Under this policy, there are two rules which are used by the government, one is the expenditure of the government and the other is the taxation or income of the government which it collects from the public.