7 If GDP is below potential what type of fiscal policy can s

7.) If GDP is below potential what type of fiscal policy can stimulate the economy through aggregrate demand?

8.) What is the realtionship between the national debt and government budget deficits?

Solution

1. When GDP is below the potential GDP, the situation is known as the contractionary gap. In this case, the government needs to give a push to the economy in order to create more employment and produce more output. Thus, the expansionary fiscal policy has to be used.

2. The budget deficit is the amount of money that government borrows every year. The debt is the total money that the government owes. So, we can say that the debt is the accumulation of budget deficit over the years.