fiscal policy multiples

Question 1

Evaluation of Fiscal Policy

Answer 1

Disincentives to work
Reduced public services
Poor information

Time Lags
Increase in budget deficit
Depends upon other components of AD

Monetarist Critique
Depends on size of the multiplier

Question 2

Economic Effects of Government Borrowing (consequences of a budget deficit)

Answer 2

Increased aggregate demand (AD)
Higher taxes and lower spending
Loss of Confidence

Higher debt interest payments
Crowding out

Increased Interest rates
Inflation

Question 3

Advantages of Govt Borrowing

Answer 3

Govt Borrowing can be beneficial under certain conditions - recession

Investment
Bailout key industries