Question

4. Evaluating fiscal policy Aa Aa The graph below shows an economy's government expenditures (G) and tax revenues (T) at different levels of real GDP G AND T Billions of dollars) 280 T 2008 270 260 250 240 230 220 210 200 600 640 680 720 760 REAL 00P (Bitions of dollars) Hee Clear AL Suppose the economy's full-employment level of real GDP is $680 billion. In 2006, the economy was operating at its full-employment output level, so the standardized budget deficit was In 2007, real GDP increased from $680 billion to $700 billion and the government did not take discretionary fiscal action. In 2007, the government ran a cyclical budget policy stance is best described as of The government's fiscal In 2008, real GDP was still $700 billion ($20 billion above the full-employment output level) and the government decided to pursue a discretionary fiscal policy that would increase economy-wide taxes. The tax hike caused tax revenues to rise by $10 billion at each level of real GDP. Use the red line (cross symbols) to show the new tax revenue schedule ater the 2008 tax hike. In 2008, there was a standardized budget fiscal policy stance was , suggesting that the government's

Answer 1

At real GDP = $680 million, the Government Expenditure is equal to the Tax Revenue of the government, thus, standardized budget deficit = $0

At real GDP = $700 million, Government ran a cyclical budget surplus of $10 million (tax = $260 billion - Government Expenditure =$250 billion). The fiscal policy stance is best described as Contractionary because level of taxes in the economy exceed the government expenditure.

The tax schedule will shift upwards by $10 billion after 2008 tax hike.

Surplus of $20 billion, contractionary.