Econ 3'36 Analytical Assignment #3 Questions 1 - 6: Consider the following statement: \"A fiscal expansion will always reduce investment in an economy". Now consider the following "answer" to the question given by ChatE FT [a popular AI linguistics Chatbot]: "This statement is false. n fiscal expansion, which refers to an increase in government spending or a decrease in taxes, can have a variety of effects on investment in an economy. it depends on the specific circumstances of the economy, as well as the way that the fiscal expansion is implemented. in some cases, a fiscal expansion can lead to an increase in investment. For example, if the fiscal expansion leads to an increase in consumer demand, firms may respond by increasing their investment in order to meet this demand. Additionally, if the fiscal expansion includes measures to increase the availability of credit, such as by lowering interest rates, this can also encourage investment hy making it cheaper for firms to horraw money. [in the other hand, a fiscal expansion can also lead to a decrease in investment in some cases. if the fiscal expansion leads to an increase in the government's budget deficit, this can create uncertainty about the government's future fiscal policy, which can discourage investment. Additionally, if the fiscal expansion leads to an increase in the supply of credit, this can lead to an increase in the competition for in vestment funds, which can lead to a decrease in investment. Uverall, it is difficult to moire a general statement about the effect of fiscal expansion on investment, as the specific circumstances of the economy and the details of the fiscal expansion will influence its impact. " At first glance, the answer above may seem very reasonable. However, there are a number of issues with it. So, let's critique EhatEF'T's answer. In the paragraph where it says "in some cases, a fiscal expansion can lead to an increase in investment. ", within the first sentence following this statement, the Al is trying to argue that a scal expansion may increase consumption spending. 1. {1 pt1IWhat is the mechanism by which that happens? [That is, utilize the lS-le'l model to desc rihe the variables in the model that would be impacted, and how they would end up increasing investment] 2. {E ptsl Given the mechanism you articulated in question 1, describe what is incorrect about this argument: that is, why a scal expansion leading to an increase in consumption may not in fact subsequently lead to an increase in investment. [Hint: it's missing a channel for how scal policy works within the IELl'vl framework] Econ 736 Analytical Assignment #3 3. (1 pt) What assumption(s) would have to be true for a fiscal expansion that increases consumption, to increase investment at the end of the day? 4. (2pts) Now consider the last part of this second paragraph: "Additionally, if the fiscal expansion includes measures to increase the availability of credit, such as by lowering interest rates, this can also encourage investment by making it cheaper for firms to borrow money." Why is this statement totally incorrect? 5. (3 pts) In the paragraph where it says "... a fiscal expansion can also lead to a decrease in investment in some cases. ", what does it get correct? What does it get incorrect? 6. (1 pt) Overall, was ChatGPT correct in stating that the answer is false? (YES/NO)