"Fiscal Policy Can Have a Permanent Effect on Real Growth

question 65

Essay

"Fiscal policy can have a permanent effect on real growth because of intertemporal substitution." Explain this statement with the aid of an AD-AS diagram.

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Definitions:

Income Tax Expense

The amount of money that a company is required to pay in taxes based on its taxable income.

Depreciation Expense

The method of allocating the cost of a tangible asset over its useful life, reflecting its decrease in value over time.

Operating Income

Earnings before interest and taxes (EBIT), calculated as gross profit minus all operating expenses, including depreciation and amortization.

Investments

Financial assets purchased with the aim of generating income or appreciation in value over time.