This economics question tests your understanding of economic models and analysis. The step-by-step answer below applies the relevant framework and explains the reasoning.
ScanSolve AI Answer
(a) Step 1: The formula for the simple spending multiplier is k = (1)/(1 - c) where c is the marginal propensity to consume (MPC). Step 2: Substitute c = 0.8: k = (1)/(1 - 0.8) = (1)/(0.2) Step 3: Simplify: k = 5 The multiplier is 5. 5 (b) From the multiplier of 5, the government can improve the economy by using expansionary fiscal policy. One measure is to increase government spending (G). For example, a 10 billion increase in G leads to: Y = k × G = 5 × 10 = 50 billion increase in GDP. (c) Step 1: In the AD/AS model, expansionary fiscal policy (e.g., G or T) shifts the AD curve rightward from AD_1 to AD_2. Step 2: Short-run effect: Intersection with SRAS moves from E_1 to E_2, increasing real output from Y_1 to Y_2 and price level from P_1 to P_2. Step 3: This closes a recessionary gap if the economy is below full employment (Y_f). Contractionary policy shifts AD left to close an inflationary gap. Fiscal policy thus stabilizes output via AD shifts. (d) The two types of fiscal policy Bulgaria can use are: 1. Expansionary fiscal policy: Increase G or cut taxes to boost AD. 2. Contractionary fiscal policy: Decrease G or raise taxes to reduce AD. (e) Kenya's heavy reliance on domestic and international borrowing has negative effects: 1. High debt servicing costs: Crowds out private investment and essential spending (e.g., health, education). 2. Vulnerability to external shocks: Currency depreciation increases foreign debt burden; donor conditions limit policy autonomy. 3. Inflationary pressure: Domestic borrowing raises interest rates. (f) Two measures for better fiscal management: 1. Implement fiscal rules: Set legal limits on budget deficits (e.g., deficit < 3% of GDP) to enforce discipline and prevent overspending. 2. Debt sustainability analysis: Regularly assess debt-to-GDP ratio and introduce medium-term expenditure frameworks to align spending with revenue.