What fiscal policy actions would you recommend at the following instances?

Question

a. The economy begins at potential, but foreign economies slow dramatically

b. The economy has been operating above potential output and inflationary pressures rise.

c. A new technology is invented that significantly raises potential output.

Answer 1

a. The economy begins at potential, but foreign economies slow dramatically

--- Expansionary Fiscal policy with freer import regime

b. The economy has been operating above potential output and inflationary pressures rise.

---- Contractionary fiscal policy (reduced govt expenditure, higher taxes, etc.

c. A new technology is invented that significantly raises potential output.

--- Expansionary demand creating policy with sharper focus on crowding in of private investments