Question 3

question 3.1

a) Briefly explain how a decrease in housing prices would affect consumption and investment.   You may assume that consumers would like to maintain their target wealth.

b) Given your answer to a), what is likely to happen to GDP? Explain using a diagram. 

c) Given your answer to b), how can the government use fiscal policy to prevent GDP from changing?  Use a diagram in your explanation.

d) If the marginal propensity to import is large, what can be said about effectiveness of fiscal policy?

question 3.2

Country X has run budget deficit for the past twenty years and its government debt stands at 120% of GDP.   Due to pandemic of COVID-19 the government considers implementing big investment in infrastructure and effective decrease in taxes. Expert 1 says that the debt to GDP ratio is too high and the country cannot afford increasing it any further. Expert 1 suggests printing money instead to finance budget deficit arguing that it would be cheaper and more efficient way of financing budget deficit. You are hired as Expert 2.  Would you agree with Expert 1?  Explain.  What would be your advice to the government?