QUESTION 1

Analyse the outcome that the following occurrences would have on the multiplier effect.

a)As recession ends and recovery begins, consumers are feeling less cautious about spending.

(5 marks)

b)Uncertainty about national security and political relations abroad causes the public to adjust by saving more to use in case of worldwide economic downturn.

QUESTION 2

a)Distinguish between the demand-side and supply-side fiscal policy and how both work in mitigating the problem of inflation. In this regards, clarify the mechanism of the policy in each circumstances.

(12 marks)

b)Illustrate your answer in (a) by using AE and AD-AS model (for demand-side policy) and AD-AS model only (for supply-side policy).

QUESTION 3

"If taxes and government spending are increased by the same amount, there will still be a positive effect on equilibrium GDP."Is this statement correct? Discuss by giving appropriate examples of scenario, data and/or diagrams to justify your answer.