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After the Global Financial Crisis of 2008, the US President introduced expansionary fiscal policies of $800 billion - Edexcel - A-Level Economics A - Question 1 - 2021 - Paper 2
Question 1
After the Global Financial Crisis of 2008, the US President introduced expansionary fiscal policies of $800 billion. The International Monetary Fund estimated that t... show full transcript
Worked Solution & Example Answer:After the Global Financial Crisis of 2008, the US President introduced expansionary fiscal policies of $800 billion - Edexcel - A-Level Economics A - Question 1 - 2021 - Paper 2
Step 1
Which one of the following is a withdrawal from the circular flow of income?
Answer
The correct answer is D) Taxation. This option represents a withdrawal because it removes money from the circular flow of income, whereas the others (exports, government spending, and investment) all inject money into the flow.
Step 2
Calculate the total final increase in US aggregate demand as a result of the President's expansionary fiscal policies, assuming no other changes.
Answer
To calculate the total increase in aggregate demand, we use the formula:
Increase = Multiplier × Initial Increase
In this case, the multiplier is 1.5 and the initial increase is $800 billion:
Increase = 1.5 × 800 ext{ billion} = 1200 ext{ billion}
Thus, the total final increase in aggregate demand is $1,200 billion.