Answer the questions on the effects of active fiscal policy on the economy in various scenarios:

a)Suppose, the financial crisis in Asia Pacific region reduces the demand for Singaporean exports. This negative demand shock severely affects Singapore which is a small open economy. As a result, Singaporean economy went into recession (output falls below the potential level). Assume, economy was in good shape before the shock (operating at its potential capacity Y*). Suppose the government of Singapore decide to boost its spending (G) to counteract the fall in AD due to fall in exports (NX component of AD).

Do you think government has to increase G by the same amount as fall in NX? (1 mark).

Explain your reasoning

Is crowding out a concern here? (1 mark)

B)Suppose, the Australian economy is in good shape (operating at its productive capacity Y*). However, because of upcoming elections the Australian government decides to boost its spending (G).

How will this policy of fiscal expansion affect the level of interest rates in the economy (assume balanced budget before this expansion)? (1 mark).

Explain your answer in writing. Diagram is not needed.(2 marks).

Is crowding out a concern in this scenario? (1 mark).

C)Suppose, government is undertaking expansionary fiscal policy because of recessionary concerns. How will the effectiveness of the policy be affected if public is feeling cautious and not spending much? Present your arguments2 marks(Hint: think about the size of the multiplier effect).