Question:

The following quote discusses the 2016 fiscal stimulus. What concepts from macroeconomics help understand how effective this policy would be in stimulating the economy? Explain.

The quote:

Prime Minister Shinzo Abe, fresh off a big election win, last week ordered his government to work on a stimulus plan to revive an economy dogged by sluggish consumption and investment...

The [government spending] package will have a headline figure of at least 20 trillion yen ($186.55 billion), three government sources told Reuters on Thursday...

But despite the startling headline figure - equal to more than 4 percent of gross domestic product - real government spending to boost economic growth is actually in line with or smaller than previous expectations...

About half of the nominal 20 trillion yen is expected to come from a combination of direct spending from both national and local governments...

The other half, government sources say, is expected to come from private sector firms that get state subsidies and lending from quasi-government financial institutions. "The creativity with which this can be spun out to generate anywhere from 8-20 trillion is truly admirable," he added.

The spending is also likely to be spread over several years, reducing its immediate impact, while doubts persist over how much private investment will really rise given funds are already easy to obtain due to already rock-bottom interest rates.

Whatever the source, much of the spending looks to be targeted at infrastructure projects, such as port improvements and speeding up construction of an ultra-fast "maglev" train line from Tokyo to Osaka...

Some analysts are wondering just how much it will contribute to long-term growth. "What matters is whether there are policies to address the shrinking, ageing population and globalisation," SMBC Nikko Securities' Suezawa said. "Without policies linked to the long-term growth of Japan's economy, it could have little impact and just worsen public finances."

[Reuters, 07/21/16]