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why does fiscal policy more effectively offset negative shock from a decrease in consumer spending, compared...

why does fiscal policy more effectively offset negative shock from a decrease in consumer spending, compared to a real shock? explain in 3 sentences or less

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Answer #1

This is so because the fiscal policy results in a multiplier effect which multiplies the magnitude of effect when a fiscal policy is carried out. This is not true for a real shock because it changes the aggregate demand or aggregated supply by the amount of change. However, in case of fiscal policy the change is more than the changed variable amount e.g. increase in government expenditure by $100 million will result in increase in the GDP or income by more than $100 million.

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