CB2 September 2018

Hi,

Q24 - Fiscal policy is the use of government spending and taxation to affect the level of aggregate demand in the economy. For example, an expansionary fiscal policy, involving increases in government spending and/or reductions in taxation, could be used to increase aggregate demand and increase output and employment.

The main problems of such a policy are:
- the possibility of crowding out (ie increased government expenditure could “crowd out” private sector spending)
- the uncertainty about the size of the effects of the policy because of the difficulty in predicting consumer and business reaction to tax and income changes
- time lags, which could make the policy destabilising, rather than stabilising.

These points are covered by Options A, B and C. Option D must therefore be the answer. The unknown size of the accelerator effect (which largely depends on business confidence) adds to the uncertainty, but it is not specifically a problem of fiscal policy.

Q20 - This is just the definition of the precautionary motive for holding money.

I hope this helps,

Anna