Question

A.3 Lucas noted that business cycles seem to be the same everywhere. One implication is that the effect of fiscal policy on the output gap is likely to be the same in Canada as in European economies. This statement true , false or uncertain?

Answer 1

Correct Answer:

Uncertain

The fiscal policies can be expansionary or contractionary in nature if it is discretionary. If a expnasionary fiscal policy, will be implemented in Canada, then it will stimulate the demand and output gap will decrease. The same results will be achieved when it will be implemented in the EU economy. but, the level of impact will be different. Canada is one nation with one policy. But, EU is the group of nations where each nation has its own macro-economic problems. So, one country getting more benefits, will not be replicated the same in other countries. So, to achieve the similar results, it is important for the EU that policy should be implemented at the European union level. If not, then results will be different.