The economy has seen the unemployment rate increase from 5.7% to 9.5% due to the Covid-19 crisis. During the same period, the rate of inflation declined from 1.9% to 0.7%, and the government had a budget deficit. The government wants to use fiscal policy to spur rapid growth of real GDP. It is weighing whether to spend more on infrastructure programs or to cut income taxes.
a) Explain and use appropriate graph(s) to show the short- and long-run effects of new infrastructure expenditure.
b) Explain and use appropriate graph(s) to show how a cut in income taxes would change macroeconomic variables in the short run and long run.
c) Of the two fiscal policies, which one would increase the rate of economic growth? Explain.
d) Explain the risks of the two fiscal policies. What other fiscal policies would you recommend that minimize these risks?