Answer the next question using the following budget information for a hypothetical economy. Assume that all budget surpluses are used to pay down the public debt. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Government Spending $450 500 600 640 680 600 Tax Revenues A budget surplus occurred in $425 450 500 620 580 620 GDP $2,000 3,000 4,000 5,000 4,800 5,000

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Q: 2. What is the largest component of the federal budget? A) Entitlements C) Defense B) Net interest

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Fiscal Policy and Money Market

Fiscal policy is one of the important tools that is used by the government to control inflation or aggregate demand in the economy. Under this policy, there are two rules which are used by the government, one is the expenditure of the government and the other is the taxation or income of the government which it collects from the public.