Question

Discuss the following statements: Usually a fiscal consolidation generates expansionary non-Keynesian effects

Answer 1

On investment and private consumption decisions the fiscal policy may have non-Keynesian effects. Therefore it is pertinent to identify the conditions under which a fiscal expansion can contribute to the increase the recession likelihood or increase of economic activity. If there is a significant public debt-to-GDP ratio there would be a higher probability of fiscal policy being non-Keynesian. The effects of non-Keynesian can also be associated with increase in tax at high levels of government indebtedness. When fiscal consolidation appears to the public as decreasing the requirements of public sector borrowing, there can be induced wealth effect, resulting to a rise in private consumption.

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