Question

Which of the following is a FALSE​ statement?

A. General Motors of Canada permanently closing down its Oshawa car plant effective December​ 19, 2019, will decrease aggregate expenditure.

B. The Canadian federal​ government's March​ 18, 2020 fiscal stimulus announcement of 82 billion dollars in response to the​ COVID-19 crisis​ will, ceteris​ paribus, increase aggregate expenditure.

C. The Canadian federal​ government's March​ 18, 2020 fiscal stimulus announcement of 82 billion dollars in response to the​ COVID-19 is an example of an expansionary discretionary fiscal policy.

D. General Motors of Canada permanently closing down its Oshawa car plant effective December​ 19, 2019, only affected​ Oshawa, and not the rest of Ontario and Canada.

E. The Canadian federal​ government's March​ 18, 2020 fiscal stimulus announcement of 82 billion dollars in response to the​ COVID-19 crisis​ will, ceteris​ paribus, increase equilibrium expenditure by more than​ $82 billion.

Answer 1

The answer is (d).

General Motors of Canada permanently closing down its Oshawa car plant effective December​ 19, 2019 affects not only Oshawa but the rest of Ontario and Canada. It is because a lot of employees in the Oshawa plant will now become unemployed and face lower incomes. As a result, they will lower their consumption and this will lead to a negative demand shock. Since, a lot of what is consumed in Oshawa is manufactured in other places, the negative demand shock will lower profits for all these firms and thus we can have eg=ffects in the entire economy.

(a) is true as closing down the plant means a lower income for unemployed and lower expenditure

(b) is true as fiscal stimulus is an expansionary policy and will help those affected by it increase their consumption and expenditure.

(c) is true as an increase in the fiscal stimulus is both discretionary and expansionary as t is expected to increase expenditure and incomes in the economy.

(e) is true as the fiscal stimulus will have multiplier effects and the increase in equilibrium expenditure will be more than the original stimilus amount