Question

Q1.   What are the “automatic” and “discretionary” aspects of fiscal policy and how do they fit Keynesian fiscal policy to stimulate the economy in a recession, in terms of Government spending, taxation and budget deficits in a Demand driven economy.

Q2. Use the consumption function model to explain the impact of government spending using the concepts of the Paradox of Thrift, the Multiplier effect and the role of Expectations (Consumer Confidence.)

Q3. Explain two arguments against Keynesian fiscal policy, one using the concept of “crowding out” and the other showing that it can only cause inflation. Explain the Classical fiscal policy of a small government with a balanced budget in a self-regulating economy with flexible prices under a laissez-faire policy.

Q4. How does Structural Unemployment explain current trends in Labor Force Participation rates? What is the role of outsourcing and how does it fit with the U.S. economy becoming a “service’ economy?

Q5. Explain how “discouraged workers” (unemployed workers leaving the labor force) lower the official unemployment rate. ‘Real’ wages being stagnant, what does the low unemployment rate mean?

Q6. Describe the economic impact of the Covid-19 pandemic in terms of globalized supply chains. Mention particular sectors and industries that are affected. How is the drop in oil prices related to the pandemic?

Answer 1

Q.1)

Automatic Fiscal policy refers to the change in the expenditure and tax without the active intervention of government. Expenditure and tax change according to the level of economic activities.

Discretionary fiscal policy means a change in the deliberate change in expenditure and taxation.

A recession occurs when there is a sharp fall in the aggregate demand in the economy. Fall in the aggregate demand causes falls in output and employment. when output falls, the fall in the income reduces the tax liabilities as well. Thus purchasing power rises, further government unemployment benefits get automatically activated. it increases the aggregate demand. that helps to overcome the deficient demand.

The government also goes with the discretionary fiscal policy where the government uses the deliberate change in the expenditure and tax to drive up the aggregate demand in the economy. The aggregate demand would cause a rise in employment.