W9 - Fiscal Policy 2

Question 1

Expansionary fiscal policy

Answer 1

When increase in government spending or taxes to increase output
- usually when in recession or inflation

Question 2

What is the two-equation model for Fiscal Policy?

Answer 2

Short term impacts of one - off policy changes
e.g tax to get out of recession

Question 3

What do we need to take in the two-equation model

Answer 3

• Closed economy (X = M = 0)
• Aggregate expenditure (GDP), Y = C + I + G

Question 4

What does the C mean for 2 equation model

Answer 4

Consumption
- C = a + b (Y-T)
where (Y-T) is disposable income

Question 5

What does the I mean for 2 equation model

Answer 5

Investment
- I = d - xr
Where r = interest rate
- Investment decreases when there’s an increase in interest rate

Question 6

What is Contradictionary fiscal policy

Answer 6

Gov reducing spending or increasing taxes to slow down/ reduce inflation/ economic growth

Question 7

What happens to public opinion during recession

Answer 7

• reduce confidence
• reduce like of political party
• people may withdraw money from banks