Question

True or false? Explain your answer.

a. Unlike fiscal policy, expansionary monetary policy will not cause multiplier effects and
crowding out effects.
b. The government should not implement a zero-inflation policy, because when inflation is
zero, the unemployment rate will be too high, which is lasting higher cost for the economy.

Answer 1

A) True, the expansionary monetary policy will not casuse multiplier effect and crowding out effect.

Reason = crowding out effect is a situation when government borrowing and spending results in higher interest rate and tax rate due to which the new investment in business and household consumption reduces. The crowding out effect generally arise due to expansionary fiscal policy, because when government spending increases, it can finance this higher spending through increase in tax rate or increase in borrowing.

B) true,

Zero inflation rate means the economy might be facing deflation( negative inflation) in future. Deflation causes reduce in the general price level in the economy. Reduction in price level means less production, when the production in the economy reduces the wages starts falling. Reduction in wage rate means fall in consumption due to which further fall in price. So this cycle repeat itself finally it increase the unemployment rate in the economy. Hence we can say that Zero inflation rate causes the unemployment rate is too high.