Which of the following is an example of an unintended effect...

Which of the following is an example of an unintended effect of fiscal policy? 1) The crowding-out effect 2) Increased aggregate demand 3) Unemployment insurance 4) Reductions in international trade

Transcript

00:01 So here we're talking about fiscal policy and in particular the side effects of fiscal policy, the things that happen that are not intended.

00:08 The first one is the correct answer, right? crowding out.

00:13 Crowding out refers to the idea that as government spending increases, this tends to push up interest rates, right? when the government enters the market and borrows money, interest rates go up.

00:25 This tends to dissuade investment and consumption, right? so it crowds out these other things by removing the funds available, right? let's imagine that a firm was going to borrow money to build a factory.

00:43 Now the government comes in first, borrows money, drives the price up.

00:46 The firm decides to no longer borrow the money.

00:49 So it crowds out the investment.

00:51 This is absolutely the classic side effect of fiscal policy.

00:55 Right? two, increased aggregate demand.

01:01 Well, this is what the goal is, right? this is the goal.

01:06 You are trying, by spending more money, the whole point of fiscal policy is to stimulate aggregate demand, right? absolutely, right? 100%.

01:16 Absolutely.

01:18 Three, unemployment insurance.

01:21 Now, this one is a little bit vague.

01:23 They don't talk about it.

01:26 But what i suspect what they mean here is that an increase in government spending tends to reduce unemployment insurance expenses.