Question

1.  What is the business cycle?   How does unemployment and inflation vary over the business cycle?

2. What is NAIRU and why is it important.   What problems will the economy face if there is a large output gap?

3.  Explain the impact of government expenditures on the equilibrium level of income. How does this differ from the effect of changes in taxation?  What is the multiplier?

4 . Explain the impact of the time lags associated with discretionary fiscal policy. Which do you think is the most important? Do you think fiscal policy may be easier to operate during an inflation or a recession? Explain.

5.  What is the economic impact of a federal budget deficit?   Describe the effect of debt financing accomplished by a sale of bonds to the general public.

Answer 1

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What is business cycle

• The business cycle describes the increase or decrease of production o/p of services and goods in the economy.
• It is also called trade or economic cycle.
• It also describes GDP in the country.

How the inflation and unemployment vary over business cycle ?

• Inflation is high and the unemployment is low when the business activity is at a temporary maximum.
• Inflation decreases and unemployment increases when in the total output recession is negative or decreased.
• At the bottom of recission time(trough) the unemployment maximizes and inflation decreases.
• During expansion unemployment begins to fall and inflation tends to increase.

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