Practice question · Multiple choice
The same stimulus produces a much larger effect in a deep recession than in a boom. What accounts for the difference?
Hints
- Ask what the newly hired workers were doing before the stimulus, in each case.
- If everyone already has a job, where do the extra workers come from?
Show the answer
C. Idle resources, which a slump has and a boom does not
Why
Spending only creates output if there is slack to activate; at full employment it moves resources rather than adding them, and the effect shows up in prices. The multiplier is therefore state-dependent, which is why 'does stimulus work?' has no answer without asking when.
Practise Fiscal Policy
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More questions on Fiscal Policy
- Why might a large debt-financed stimulus partially _undermine itself_?
- Which are genuine limitations of discretionary fiscal policy?
- The spending multiplier is larger when the marginal propensity to consume is higher. Why does that make the…
- A country running a budget deficit must see its public debt rise as a share of GDP.
- Sort each stabilizing force: automatic stabilizer or discretionary measure?
- Match each fiscal concept to its definition.