Evaluation points for macroeconomics (Unit 2)

Evaluating fiscal policy:

1. Opportunity cost - relevant for spending decisions e.g. high spending on welfare benefits reduces budget available for other government services e.g. healthcare, the decision of how best to spend tax revenue on may be a normative one i.e. an opportunity cost will always exist and the next best alternative must be sacrificed/given up 

2. Size of the multiplier effect - multiplier effect occurs when there is an injection to the circular flow (G, I, X) and is calculated by 1/MPW (marginal propensity to withdraw). For example an increase in government spending has a multiplier effect on consumption as incomes increase - the size of the multiplier may change throughout the business cycle

3. Crowding out - increase in government spending (G) may reduce private sector activity. Interest rates increase as government spending increases, so private sector investment I may offset any increase.