B) The solution to the first issue is despite the slower than expected growth, the overall strategy of adhering to moderate fiscal consolidation has been confirmed. If the chancellor of the exchequer does not adhere to his strategy and choose Keynesian spending to raise interest rates, then the reaction of the financial market may be very bad. When our financial problems have been and are very serious, keeping bond yield low is a considerable achievement. The fiscal deficit from the “financial dilemma.” After that, the planned deficit reduction should remain unchanged at least at a minimum of course you should not relax. As the economy continue to grow there is a very strong reason to cut spending and cut taxes.
The solution to the second issue is if the ZLB often prevent the Fed from providing sufficient stimulus then on average, the inflation is expected to be below the fed’s 2% target a clear indication of KR’s simulation. The problem is that neither market this kind of underfunding. There are various possibilities but the market and forecasters may only believe that the fed will develop policy methods to overcome the ZLB issue.
The solution to the third issue is in the case of near full employment the higher government borrowing will lead to crowding out the government lending reduces the size of the private sector and reduces privates sector investment. Before that, as the economy grows, increase government borrowing may push up bond yields and higher interest rates, which may reduce private sector investment. Then, if the economy is fully employed and the government adopts an expansionary fiscal policy, they will see a higher inflation rate and can save tax cuts without spending money. In a serve recession, consumers may be reluctant to spend money even if you cut taxes. This may also depend on the amount of tax you are tax deducting. Low income workers have a higher marginal propensity spending. In times lags, fiscal policy takes time to implement. The government must decide which projects to follow and there is time before the project begins.