Assume that the expenditure and tax multipliers can be estimated to be 0.75 and 0.5 respectively.

1. Would you recommend expansionary fiscal policy based on tax cuts or increased government expenditures?
2. Suppose now that there is substantial evidence that supports the hypothesis of a crowding out effect in this economy. How would your answer to b) change?

A government committed to long run fiscal discipline (i.e. low or zero budget deficits) usually conducts contractionary fiscal policy at some point to reduce the government deficit. If that action is interpreted as a commitment to long run fiscal discipline.

1. Describe the effect on autonomous consumption and investment expenditure.
2. Describe the effects on the cost of borrowing by issuing bonds.

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