Which of the Following Best Describes the Impact of Fiscal

question 20

Multiple Choice

Which of the following best describes the impact of fiscal policy during the Great Depression?

• A) Despite the large increases in government spending as a share of GDP when the New Deal policies were initiated, the expansionary fiscal policy failed to stimulate demand.
• B) Fiscal policy was focused on monetary expansion, when it should have focused on maintaining a balanced budget.
• C) It is difficult to link expansionary fiscal policy with economic recovery because government spending and budget deficits were a relatively small portion of GDP prior to the beginning of World War II.
• D) There is a direct correlation between increases in government spending as a share of GDP and increases in output and employment.

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Definitions:

Debt Ratio

The portion of assets financed by debt, showing the extent to which a company relies on borrowed funds for its operations.

MM Model

Refers to the Modigliani-Miller theorem, a foundational concept in corporate finance that states that under certain market conditions, the value of a firm is unaffected by how it is financed.

Arbitrage

The simultaneous buying and selling of the same commodity or security in two different markets at different prices, thus pocketing a risk-free return.

Capital Structure

The mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity, which is used to finance its overall operations and growth.