1. Indicate whether each of the following government actions are Expansionary or Contractionary. Determine if the situation describes to changes in leakages or injections and whether it increases or decreases. Then indicate whether it is an automatic or discretionary stabilizer. /18 a) In middle of a recession, government provides subsidies to support exports of Canadian products. b) As the recession deepens, government expenditures on employment insurance increase ($ paid to unemployed people by the government)... c) The Government passes a new law to impose a new carbon tax d) As the economy slows, Government spends 100's of millions on roads and bridges. e) As the economy strengthens in a strong recovery, the amount of tax money from sales tax increases f) In the midst of a recession, the federal government decides to reduce income tax rates. Put a check mark in the proper boxes You will complete 3 columns for each prompt – a prompt will either effect leakages or injections. (not Both) Automatic Expansionary OR Reduce or Increase Increase or decrease OR Contractionary Leakage Injections Discretionary A B E

1. Indicate whether each of the following government actions are Expansionary or Contractionary. Determine if the situation describes to changes in leakages or injections and whether it increases or decreases. Then indicate whether it is an automatic or discretionary stabilizer. /18 a) In middle of a recession, government provides subsidies to support exports of Canadian products. b) As the recession deepens, government expenditures on employment insurance increase ($ paid to unemployed people by the government)... c) The Government passes a new law to impose a new carbon tax d) As the economy slows, Government spends 100's of millions on roads and bridges. e) As the economy strengthens in a strong recovery, the amount of tax money from sales tax increases f) In the midst of a recession, the federal government decides to reduce income tax rates. Put a check mark in the proper boxes You will complete 3 columns for each prompt – a prompt will either effect leakages or injections. (not Both) Automatic Expansionary OR Reduce or Increase Increase or decrease OR Contractionary Leakage Injections Discretionary A B E

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter24: Fiscal Policy

Section: Chapter Questions

Problem 5P

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Similar questions

Explain how automatic stabilizers work, both on the taxation side and on the spending side, first in a situation where the economy is producing less than potential GDP and then in a situation where the economy Is producing more than potential GDP.
Under what general macroeconomic circumstances might a government use expansionary fiscal policy? When might it use contractionary fiscal policy?
Assume there is no discretionary increase in government spending. Explain how an improving economy will affect the budget balance and, in turn, investment and the trade balance.
What would happen if expansionary fiscal policy was implemented in a recession but, due to lag, did not actually take effect until after the economy was back to potential GDP?
Explain the difference between the government purchases multiplier and the net tax multiplier. If the MPC falls, what happens to the tax multiplier?
Why is spending by the U.S. government on scientific research at NASA fiscal policy while spending by the University of Illinois is not fiscal policy? Why is a cut in the payroll tax fiscal policy whereas a cut in a state income tax is not fiscal policy?
2. Suppose the economy is in recession. Policymakers estimate that aggregate demand is$100 billion short of the amount necessary to generate the long run natural rate of output.That is, if aggregate demand were shifted to the right by $100 billion, the economy would be inlong run equilibrium.a. Explain the impact on the economy if the government chooses to use fiscal policy to stabilizethe economy and the marginal propensity to consume (MPC) is given as 0.75 with no crowdingout.b. If there is a crowding out effect and investment is very sensitive to changes in the interest rate,should the government increase spending more or less than this amount?
a) Suppose that there are no crowding-out effects and the MPC is 0.8. By how much must the government increase expenditures shift the aggregate-demand curve right $10 billion? b. The model of Long-run Growth, proposes that fiscal policy can have lasting effects on savings, investment, and economic growth. On the other hand, the model of Aggregate Demand-Aggregate Supply suggests that the only long run effect of fiscal policy is an increase in the price level. How could you use the Aggregate Demand and Aggregate Supply model for a more accurate description of the short-run and long-run effects of an increase in government spending? Could you distinguish between different uses of government expenditures to predict their effects on prices and output?
a) What are the three fiscal policy tools and how would each be used to counter a contractionary gap? b) True or False and explain: Fiscal Policy is effective at reducing the duration of an economic contraction. c) If the spending multiplier is 2.5 and the economy is in a $500 billion contractionary gap, how much should I increase government purchases to eliminate the gap? d) Continuing with c, if the MPC is 0.8, how much would I need to increase transfer payments to eliminate the $500 billion contractionary gap? e) True or False and explain: Households always react to tax changes in a predictable manner. Module 6: Deficits and the Debt. a) Distinguish between deficit and debt. b) Explain what crowding out is and why it reduces the impact of fiscal stimulus. c) True or false and explain: The national debt represents a threat of bankruptcy. (For d and e) Suppose the interest on the debt was $600 billion. If interest is paid domestically, 90% will be spent domestically (the remainder is…
A Fiscal Stimulus Program to Fight the Corona Crisis?The German government wants to decide about the design of a stimulus package to combatthe economic consequences of the Corona pandemic Assume that the German economy is currently fully described by the following equations(with C= Consumption, Y= Income, T= Tax):C = 260 + 0.6(Y-T)T = 0.2YCurrent investments are 400 and government expenditures are 380.Three policy options are discussed:Option A: No stimulus programOption B: Additional government spending of €156 billionOption C: As option B, but a part of the additional government expenditures will be used forincentives to invest in renewable energy as such that an increase in private investments by 26can be expected.Calculate equilibrium income and the budget surplus for all 3 Options. Are all options in linewith the Maastricht government deficit criteria
A Fiscal Stimulus Program to Fight the Corona Crisis?The German government wants to decide about the design of a stimulus package to combatthe economic consequences of the Corona pandemic.Task 1 Assume that the German economy is currently fully described by the following equations(with C= Consumption, Y= Income, T= Tax):C = 260 + 0.6(Y-T)T = 0.2YCurrent investments are 400 and government expenditures are 380.Three policy options are discussed:Option A: No stimulus programOption B: Additional government spending of €156 billionOption C: As option B, but a part of the additional government expenditures will be used forincentives to invest in renewable energy as such that an increase in private investments by 26can be expected.Calculate equilibrium income and the budget surplus for all 3 Options. Are all options in linewith the Maastricht government deficit criteria?
(a) Assuming an economy is experiencing inflation, what are discretionary fiscal policy options that can be utilized by the government to address the situation? (b) Assuming an economy is in a recession, what are discretionary fiscal policy options that can be utilized by the government to move the economy out of the recession? (c) What is the difference between discretionary fiscal policy options and automatic stabilizers and explain how automatic stabilizers can be applied in an inflationary economy and a recessionary economy.