1. The automatic stabilisers operate in a counter-cyclical fashion and ensure that the government fiscal balance, which rises during a recession, returns to its appropriate level once growth returns to its long-term trend.

2. Which scenario represents a more expansionary outcome: (a) A fiscal deficit equivalent to 5 per cent of GDP (including the impact of automatic stabilisers equivalent to 3 per cent of GDP). (b) A fiscal deficit equivalent to 3 per cent of GDP. (c) You cannot tell because you do not know the decomposition between the cyclical and structural components in Option (b).

3. If private domestic investment is less than private domestic saving and the current account is in deficit then the government fiscal balance will be in deficit no matter what growth rate GDP is generated.