Recover from deep recession + targeting specific economic sector
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15
If fiscal policy increases both AS and AD, how do we know whether there will be inflation or (benign) deflation?
Depends on whether AS or AD increases by a larger amount! In reality probably inflation
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15
If MPC increases, the Keynesian multiplier would…
MPC increases: multiplier increases! e.g. 1/(1-0.4) = 1.667 vs. 1/(1-0.6)=2.5
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15
Identify TWO examples of transfer payments.
Unemployment benefits, social security (retirement) etc.
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15
Define automatic stabilizers
Automatic stabilizers are factors that stabilize the economy without government intervention by dampening the short-term fluctuations of the business cycle.
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15
Transfer payments are not counted in government spending. True or false + explain.
True. Does not go to firms (goes to consumers) so does not lead to output.
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15
Outline THREE limitations of fiscal policy.
Political pressures, Time lags, Sustainable debt, Crowding out
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15
Briefly explain what is meant by crowding out.
When increased gov't borrowing causes interest rates to rise and reduces private borrowing as a result
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15
Graph out crowding out using a money supply / money market diagram.
Graph correctly!
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15
Identify TWO forms of automatic stabilizers.
Progressive taxes, unemployment benefits
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15
The formula for calculating how much GDP increases due to injections is...
change in GDP = amount of injection x 1/(1-MPC)
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15
The formula for the Keynesian Multiplier is...
1/(1-MPC) = 1/(MPM+MPS+MPT)
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15
Using an example, explain how automatic stabilizers work during a contraction and expansion
Unemployment benefits: contraction = distribute benefits --> increase AD; expansions = less benefits --> AD doesn't increase too quickly
