A decline in the structural deficit is generally a sign that fiscal policy: a. is working...

A decline in the structural deficit is generally a sign that fiscal policy:

	a.	is working to stimulate AD.
	b.	is working to restrain AD.
	c.	is having no effect on AD.
	d.	is turning into monetary policy.

Solutions

Expert Solution

When government faces budget deficit due to higher government expenditure for increasing aggregate demand, then for financing these deficits, government borrow from loanable fund market. As a result, demand for loanable fund increases, so demand curve shifts rightward. Hence real interest rate increases. At higher interest rate private investment spending decrease. So the extra government expenditure done by the government diminishes for increasing aggregate demand. This is known as the crowding out.

Hence it means if government borrows from loanable fund market for financing its fiscal deficit, then private investment decreases and therefore there will be no effect of the expansionary fiscal policy. Therefore a decline in the structural deficit is generally a sign that fiscal policy is working to stimulate AD. This is because with the decrease in the structural deficit, the expansionary fiscal policy will be effective.

Hence option a is the correct answer.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Explain the relationship between the structural budget deficit and contractionary changes in fiscal policy with a...

Explain the relationship between the structural budget deficit and contractionary changes in fiscal policy with a diagram [You only need to draw the diagram]. [7 Marks]

Assuming the government of a typical economy decides to reduce their fiscal deficit by executing a fiscal deficit reduction (or rather contraction fiscal policy).

Assuming the government of a typical economy decides to reduce their fiscal deficit by executing a fiscal deficit reduction (or rather contraction fiscal policy). Based on your understanding of the concept Investment = Savings + (Tax - Govt. Spending) or I = S + (T-G) in an economy as well as spending multiplier, how will such decision by the government impact the level of investment, savings and output level (or income level) in the economy?

Topic: Fiscal Policy EXPANSIONARY FISCAL POLICY (deficit spending): When (at which phase of business cycle) is...

Topic: Fiscal Policy EXPANSIONARY FISCAL POLICY (deficit spending): When (at which phase of business cycle) is it used? What is expected as the policy outcomes? Output (GDP): Unemployment: Price level: How does interest rate increase under this policy? - CROWDING-OUT EFFECT Causes: Increase in interest rate Effects/Outcomes: - NET EXPORT EFFECT Causes: Increase in interest rate Effects/Outcomes: CONTRACTIONARY FISCAL POLICY When (at which phase of business cycle) is it used? What is expected as the policy outcomes? Output (GDP): Unemployment:...

explain the working of an expansionary fiscal policy.

How does fiscal policy play a role in deficit building?

how to draw a expansionary fiscal policy through government deficit spending

Elucidate structural deficit reasons.

Research the 2009 to 2017 Obama administration’s use of fiscal policy and deficit spending in the...

Research the 2009 to 2017 Obama administration’s use of fiscal policy and deficit spending in the face of The Great Recession which began in 2007. Focus only on fiscal policy. Do not include information about other policies such as monetary policy, healthcare, military spending, trade agreements, foreign affairs, etc. Answer the following questions: 1. Describe the main tools of fiscal policy and when it is appropriate to use them. 4. What specific fiscal policy measures did the Obama administration use,...

If a country faces a trade deficit, What fiscal policy would you propose to reduce the...

If a country faces a trade deficit, What fiscal policy would you propose to reduce the trade deficit? What monetary policy would you propose? What fiscal, monetary, and exchange rate policies would you propose if a country wanted to eliminate a trade surplus so that its citizens would have access to more consumer goods? Explain what is lilkely to value of the dollar if the following economic conditions change. (You can use a supply-demand drawing or reason with words.) The...

how do you solve for passive and structural deficit?

Subjects