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10 marksFiscal Policy

CAPE Economics Unit 2 · 2006 · Paper 2 · Question 3(c)

Suppose the government finances the increase in government spending with an equal increase in taxes to maintain a balanced budget. Explain what happens to aggregate spending as a result of a rise in both taxes and government spending.

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Other parts of this question

  1. 3(a)(i)Differentiate between 'discretionary fiscal policy' and 'automatic stabilizers'.[6 marks]
  2. 3(a)(ii)Using examples, explain how discretionary fiscal policy and automatic stabilizers work during periods of recession or inflation in an economy.[6 marks]
  3. 3(b)(i)Explain how the government can use fiscal policy (taxing and spending) to increase the equilibrium level of output from 900 billion to 1100 billion.[8 marks]
  4. 3(b)(ii)Using a 45° line diagram, graph the original situation and the solution identified in (b)(i).[10 marks]
  5. 3(d)(i)What is the balanced budget multiplier?[4 marks]
  6. 3(d)(ii)Referring to the solution in (c), how large is the balanced budget multiplier? Explain your answer.[6 marks]

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