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
Explain TWO time lags that fiscal policies are faced with.
Administrative lag (political pushback / approval processes), recognition lag (takes time to recognize issue), effectiveness lag (e.g. income tax takes time)
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15
Outline TWO strengths of fiscal policy
Recover from deep recession + targeting specific economic sector
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15
Graph out crowding out using a money supply / money market diagram.
Graph correctly!
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15
Expansionary fiscal policy always leads to inflation. True or false + explain?
To Keynesians: false! May have spare capacity. To Monetarists = true!
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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
Explain why fiscal policy may increase AS.
Any government spending which improves the quantity or quality of resources will improve AS
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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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The Keynesian Multiplier considers propensities to...
Consume (domestic) goods and services, Spend on imports, Be taxed by the government, Save
