How does the state of the economy influence the size of the government budget balance? Does the government budget balance improve or deteriorate in times of economic recession?

b. Distinguish between automatic stabilisers and discretionary fiscal policy, including ONE example of each policy. Give at least ONE factor that could limit the effectiveness of automatic stabilisers and discretionary fiscal policy.

c. The Government notices that economic growth is strong and above potential output, and that inflation is well above the 2% target, to the extent that a significant inflationary gap has emerged. As an advisor to the Government, you have been approached for your advice on what the Government can do to reduce the inflationary gap. Given your knowledge on the tools of fiscal policy, what policy do you deem appropriate? Identify ONE potential negative repercussion of the policy you proposed.