Question

Limitations of fiscal policy as a stabilization tool

Answer 1

Answer:

The Correct Statement is "Discretionary fiscal policy is less effective than is implied by the early Keynesian view".

Explanation:

The growth within the government spending once the budget is in the recession is operative to extend and to the financial gain. However, not decline the rate of interest. The budget throughout recession is during a liquidity deception. The rate of interest is at lowest and also the LM curve is horizontal at small levels of financial gain.

The growth within the government spending ends up in a rightward move of the IS curve that will increase the financial gain. This is often as a result of that the rate of interest is at such a coffee level that the rise within the speculation by the govt. couldn't displace the non-public asset.

Conversely, the Keynesian or non-Keynesian approve that economic policy has its restriction to extend the financial gain throughout a recession.

The unrestricted economic policy has downside to extend the extent of financial gain because it could be a move of the supply of asset from non-public organization to public organization.

Answer 2

Answer:

Option C is correct -  discretionary fiscal policy is less effective than is implied by the early Keynesian view.

Explanation:

When the economy is in recession, an increase in government expenditure is effective to increase the income but not to decrease the interest rate. During the recession, the economy is in a liquidity trap. At low levels of income, the interest rate is at a minimum and the LM curve is flat.

The increase in government expenditure leads to a rightward shift of the IS curve which increases the income. This is because the interest rate is at such a low level, that the increase in government investment could not crowd out the private investment.

Notwithstanding, the Keynesian and non-Keynesian economists agree that fiscal policy has its own constraints to increase the income during a recession.

The discretionary fiscal policy has a problem of increasing the level of income as it is a source of investment from private enterprise to public enterprise.

Thus, the discretionary fiscal policy is less effective than is implied by the early Keynesian view.