Principles of Economics - Economics Assignment

Internal Code: MAS3218

Economics Assignment:

1. It has been argued that Australia narrowly avoided sliding into a recession during the Global Financial & Economic Crisis of 2007-8 because the federal government used expansionary fiscal policy. Explain what ‘expansionary fiscal policy’ means, and illustrate, using the AD-AS model, how it would close a negative output gap. 2. Some economists argue that expansionary fiscal policy did not save Australia from the Global Financial & Economic Crisis of 2007-8. They say the crowding out effect undermines the power of fiscal policy. What is ‘crowding out’? If expansionary fiscal policy didn’t save the Australian economy, then what could have? 3. One glorious morning, the Reserve Bank decides to give one thousand lucky Australians one million dollars each. Let’s say each of these happy households deposits their money in their bank accounts. The banks holds 5 per cent of all new deposits ‘in reserve’, and lends out the remainder. a. What is the money multiplier? b. Assuming nothing else happens, how much money will eventually be created by the banking system due to the initial deposits by the happy households?