Answer the questions on the effects of active fiscal policy on the economy in various scenarios: Suppose, the financial crisis in Asia Pacific region reduces the demand for Singaporean exports. This negative demand shock severely affects Singapore which is a small open economy. As a result, Singaporean economy went into recession (output falls below the potential level). Assume, economy was in good shape before the shock (operating at its potential capacity Y*). Suppose the government of Singapore decide to boost its spending (G) to counteract the fall in AD due to fall in exports (NX component of AD). Do you think government has to increase G by the same amount as fall in NX? Explain your reasoning in 50 words or less. Is crowding out a concern here?
Answer the questions on the effects of active fiscal policy on the economy in various scenarios: Suppose, the financial crisis in Asia Pacific region reduces the demand for Singaporean exports. This negative demand shock severely affects Singapore which is a small open economy. As a result, Singaporean economy went into recession (output falls below the potential level). Assume, economy was in good shape before the shock (operating at its potential capacity Y*). Suppose the government of Singapore decide to boost its spending (G) to counteract the fall in AD due to fall in exports (NX component of AD). Do you think government has to increase G by the same amount as fall in NX? Explain your reasoning in 50 words or less. Is crowding out a concern here?
Chapter11: Fiscal Policy
Section: Chapter Questions
Problem 1.8P
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Answer the questions on the effects of active fiscal policy on the economy in various scenarios:
- Suppose, the financial crisis in Asia Pacific region reduces the demand for Singaporean exports. This negative demand shock severely affects Singapore which is a small open economy. As a result, Singaporean economy went into recession (output falls below the potential level). Assume, economy was in good shape before the shock (operating at its potential capacity Y*). Suppose the government of Singapore decide to boost its spending (G) to counteract the fall in AD due to fall in exports (NX component of AD).
- Do you think government has to increase G by the same amount as fall in NX?
- Explain your reasoning in 50 words or less.
- Is crowding out a concern here?
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