Reference no: EM138683

Q. (a)The Economist on the 14th February 2008 printed the following:

"More recently, the post-mortems on America's 2001 fiscal boost have been positive. By luck more than by design, the income-tax rebate was well timed (Mr Bush had promised to cut taxes long before the recession hit). It also seemed to work. One study suggested that people spent between 20-40% of their rebate in the quarter in which it was received, and over 60% of it within six months. Poorer, more credit-constrained people spent a higher share of their rebates".

The article touches on two crucial conditions for a fiscal stimulus to work. What are they? How does a fiscal stimulus work in principle? Explain your answer with the help of diagrams (AD-AS or Keynesian Cross).

(b)What are the three most important factors driving economic growth? Explain briefly using an appropriate example.