Question

                                                      Set Two

1. After the fiscal stimulus in the latest Budget, the federal government is encouraging households to spend their tax cuts on consumer goods rather than saving them. A Keynesian explanation is that saving is a leakage and only the imported component of consumption spending is a leakage.

Indicate     T   F    #

Explanation: [Limit 40 words: 2 marks]

2. Policymakers rely more on fiscal stimulus in a slump when interest rates approach zero.

Indicate     T   F    #

Explanation: [Limit 40 words: 2 marks]

Answer 1

1 - True

This is because when the stimumus is provided , the economy undergoes the multiplier process. Hence if greater part of income will not be consumed , it will reduce growth and multiplier. Savings are leakages. Hence saving amount of tax cut will lead to suffering of economy. Hence the rax cuts should be consumed

2 - True

When the interest rates have already reached Zero level , they cant be reduced further. Therefore when the economy is under slump , the fiscal policy will help in the boosting of demand and supply in economy and will take the economy out of slump.