1. Your Policy Brief needs to provide some background information on the role of fiscal policy in the economy and to explain what is meant by the 'fiscal multiplier effect'. One of your colleagues have drafted some content (see the two paragraphs below) but your task is to check this content for accuracy. In the following two paragraphs, identify any content that is inconsistent with the concepts that we have learnt in this course, and provide a corrected version.

There are three levers of fiscal policy: (1) government production of goods and services, (2) taxes, and (3) budgets. In the context of expansionary policy, the fiscal multiplier effect refers to the increase in overall GDP that results from an increase in an autonomous component of aggregate demand (such as government expenditure), minus the impact of the initial expenditure on the government's budget.

There is a risk that expansionary fiscal policy will curtail some private investment, because government spending creates extra competition for limited inputs. This puts pressure on the economy's price level, leading to rise in interest rates which can discourage investment and also net exports. However, this effect is only likely to be a concern when the economy is in a deep contraction phase and operating far below productive capacity. Even if some private investment is crowded out, higher government spending can still lead to a net positive effect on output.