A. Budget deficits increased due to expansionary fiscal policy. B. Budget defici

Question

A. Budget deficits increased due to expansionary fiscal policy.

B. Budget deficits increased due to automatic stabilizers.

C. Budget deficits increased due to crowding-out.

D. Budget deficits increased due to recognition lags.

E. Budget deficits increased due to countercyclical fiscal policy.

SNAPSHOT Recession, Stimulus, Reinvestment Unemployment rate Real GDP greawth Period of repessian 2 3 National Elections Novennter 2008 Barack Osana was elected in arge gat necause the oonramic dnclire. Long run Economic Stimulus Act February 2008 American Recovery and Roinvestment Act Feuar 2009 Ttis $188 bilionsinuus ac locueud on tax reductizrs, including a rease on 2107 taxes. Tre natale was maent to spur consumer with the etcnoy sil n sharbles, he Obama adnnisraion enacred an afected, t wns nat enougn to jog the Economy ouis seap descent in 208. kaused on government spendirg in 2000 2001 2003 2003 2001 2009 2008 2002 200B 2009 2011 2013 2013 Consider the Economic Stimulus Act passed in 2008. Which of the following could have caused real GDP to remain negative through the first half of 2009? Choose one or more: A. recognition lag B. impact lag C. implementation lag

Explanation / Answer

Part1: C :Implementation Lag :it is an example of Implementation lag as  it takes time for policy into place to hit the economy and take effect thereafter.So the GDP remained negative for few months in 2009 , post which economy started recovering

Part2:Crowding out is an effect which means that , when government increases public expenditure, the IS curve shifts right increasing the interest rate. Now, increase in interest rate means decrease in private investment spending If the LM curve is vertical, then an increase in government expenditure has no effect on the equilibrium level of income and there is total crowding out.Here however, if we would have partial crowding out effect since the local economy was initially boosted to grow, but after the increase in interest rates, there will be decrease in private investment.

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