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    Effect of Fiscal Policy

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    Determine whether each of the following would make fiscal policy more effective or less effective:
    a. A decrease in the marginal propensity to consume
    b. Shorter lags in the effect of fiscal policy
    c. Consumers suddenly becoming more concerned about permanent income that about current income
    d. More accurate measurement of the natural rate of unemployment.

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    Solution Preview

    a) This means people will save more and spend less. This would make a fiscal policy (lowering taxes to stoke the economy) less effective as people would take the tax cut and put it in the bank rather than consuming more. This is a common problem in Asian economies.

    b) This would make fiscal policy more effective as the ...

    Solution Summary

    The expert determines whether each of the following would make fiscal policy more effective or less effective.

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