Question

Use your own words to explain the following terminologies.

1. Crowing-out effect                                                                                                                 

2. Stagflation                                                                                                                               

3. Expansionary fiscal policy

4. Money neutrality

Answer 1

Answers

1. Crowding out effect

When the government intervention increases in an economic helping in balancing the economy or to create demand and supply within the economy by the government such effects caused can be termed as crowing out effect .

For example when there is decrease in the investment by the private sector is due to the crowing out effect in which the government spending is crowding out investment as it is demanding more loanable funds due to which the interest rates get high .

2. Stagflation

Stagflation is a situation in which the economy is under very high inflation and the unemployment rates are too high with low income and growth rate of the economy steadily decreases and the demand for goods also remains stagnant which results in the decrease in the growth of the economy and less scope of increase in economy .

3. Expansionary fiscal policy

Under expansionary fiscal policy the government tries to get the economy out of recession or to prevent the danger of recession by decreasing the taxes or increasing the expenditure in the economy or both .

By adopting such policy the real income of people increases and which results in consumption and thus resulting in investment opportunities and increase in the GDP of the economy and with public expediture the GDP growth takes place directly ultimately resulting in curbing the economy out of recession.

4. Money neutrality

Money neutrality is a idea in which the nominal variables only change whereas the real variables have no effect on them .

In money neutrality the price , exchange rate etc only changes with change in stock of money whereas factors like unemployment, investment etc are unaffected by change in the stock of money . Such concept is taken under long run programs .