The Focus box “Can a Budget Deficit Reduction Lead to an Output Expansion? Ireland in the 1980s” provides an example of fiscal consolidation. Ireland had a large budget deficit in 1981 and 1982.
a. What does a deficit reduction imply for the medium run and the long run? What are the advantages of reducing the deficit?
b. The box discusses two deficit reduction programs. How did they differ?
c. The box presents evidence that the two deficit reduction programs had different effects on household expectations. What is that evidence?
d. Although the data show strong output growth from 1987 to 1989, there is some evidence of continued macroeconomic weakness in Ireland during the second fiscal consolidation. What is that evidence?