Question

Determine whether each of the following is an example of a situation in which a direct expenditure offset to fiscal policy occurs.

a. In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use.

b. The government increases its expenditures without raising taxes. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.

c. The government finances the construction of a classical music museum that otherwise would never have received private funding.

Short answer

a) As a result, when the government competes with the private sector, direct spending offsets fiscal policy.

b) As a result, it is evident that the government does not compete with the private sector, but rather seeks assistance in the form of borrowing.

c) It is a direct expenditure offset to fiscal policy because the government has decided to contribute monies before the private sector makes a decision.

Step-by-step solution

:Introduction (part a)

The given is the situations in which a direct expenditure offset to Fiscal policy

The objective is to determine which situations suit the concept best

Explanation (part a)

(a)

Because the government purchases unused track, trains, passenger, and freight wagons before private persons do so in order to stimulate the nation's railroad infrastructure, this situation provides a direct expenditure offset to fiscal policy.

A reason, direct spending balances out monetary stimulus when the government competes with the financial market.

Introduction (part b)

The given is the situations in which a direct expenditure offset to Fiscal policy

The objective is to determine which situations suit the concept best

Explanation (part b)

(b)

This approach suggests indirect expenditure to the fiscal policy since the government seeks to increase spending without raising taxes. It also needs to borrow money from the private sector to cover the budget gap. This will raise market interest rates while deterring private investment expenditure plans.

As a result, it's clear that the government doesn't compete with the private sector, preferring instead to borrow money.

Introduction (part c)

The given is the situations in which a direct expenditure offset to Fiscal policy

The objective is to determine which situations suit the concept best

Explanation (part c)

(c)

Because no government or private contributions have been received for the establishment of the classical music museum, this situation clearly indicates a direct expenditure offset to fiscal policy.

Because the government opted to contribute cash before the private sector did, it is a direct expenditure offset to fiscal policy.