Question

6.) What are some of the limitations that reduce the effectiveness of fiscal policy to fully stabilize the economy?

7.) Identify each of the following as being an example of either Expansionary Fiscal Policy or Contractionary Fiscal Policy:

1. Tax Cut and Jobs Act [TCJA], 2017.
2. An increase in subsidies to farms affected by agricultural tariffs.
3. An increase in payroll tax rates
4. An increase in the childcare tax credit

8.) We are given the following information: Item Checkable Deposits Small Time Deposits Currency Money-Market Mutual Funds Held By Businesses Savings Deposits, including Money-Market Deposit Accounts Money-Market Mutual Funds Held By Individuals Billions of Dollars $597 818 639 1,045 2,866 979 a. Compute the M1 money supply b. Compute the M2 money supply

Answer 1

LImitation of fiscal policy that reduces the effectiveness of fiscal policy.

1. Difficult to pridict about future = The success of the fiscal policy depends on the accurate predictions of various economic activities. It means that through fiscal policy government increase or decrease their spending and tax rate in different sectors, for example if government reduces the tax rate in the automobile sector but people are not interested in the automobile sector, than it means reduces in the tax rate does not boost the economy, which means pridiction gone wrong.

2. Political pressure = During the expansionary fiscal policy the government increase its spending and reduce the tax rate, which causes increase in budget deficit. When budget deficit gap increases than there is political pressure on the ruling government.

3. time taking and delayed results = The results of fiscal policy is a time taking pressure. For example if government reduces the tax rate in a particualar sector, than positive outcome come from that particular sector takes time.

7. Example of Expansionary fiscal policy. = a) Tax cut and Job acts b) increase in subsidies to farms affected by agricultural tariffs

Example of contractionary fiscal policy = Increase in payroll tax rates, An increase in the childcare tax credit.

8. a) M1 = Currency + Checkable Deposits = 639 + 597 = 1236

M2 = M1 + Small time deposits + savings depoists,including Money Market Deposit Accounts = 1236+818+2866 = 4920

.