Question

14. (2 pt) Explain the effect of a discretionary cut in taxes of $40 billion on the economy when the economy's MPC is .75. How does this discretionary fiscal policy differ from a discretionary increase in government spending of $40 billion? A tax cut of $40 billion will result in initial increase in consumption of S billion). (Note that $10Bil. is saved based on marginal propensity to save (MPS), that is 25 (because 1-MPC-MPS). Then .25 x $40-$10 billion). This initial increase in spending will ultimately result in an increase in consumption spending of S multiplier process. In contrast, an initial increase in government spending of $40 billion will ultimately increase billion (.75 x S billion because of the consumer spending by $ of the initial increase is siphoned off as savings as would be the case Now you can tell how the discretionary increase in government spending has increased consumer spending of $160 billion compared to the tax cut that increased consumer spending by S billion. We conclude that the direct government spending is (more, less ) effective to increase consumer spending than the tax-cut billion ( multiplier x $ ), because none with a $40 billion tax cut. Policy option: G or T? Comment on the statement: "Increasing govemment spending (G) is preferred to a cut in taxes (T) when the U.S. government seeks to fight a recession." The statement is a ( positive, normative ) one. Either action, increased government spending (G) or taxation (T), can be used to fight a recession. Those individuals who want to fight a recession with an increase in government spending (T) may want to ( preserve, reduce) the size of government in the economy and have specific govemment programs they would like to see funded. Those individuals who prefer a tax cut (T) may want to (preserve, reduce ) the size of government and give people and the freedom to spend it as they chose. more money 15. (1 pt) Anything that increases the gov't budget deficit during a recession and increases its budget surplus during an expansion without any explicit policy action is called (Inue. False) The more progressive a tax system, the greater is the economy's built-in stability.

Answer 1

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