Government is considering a policy change to stimulate the economy by encouraging private consumption by reducing sales taxes. The loss of tax revenue will be made up by increasing taxes on corporate profits and excess savings. What are the short- and long-term effects of such a change?

Government is considering a policy change to stimulate the economy by encouraging private consumption by reducing sales taxes. The loss of tax revenue will be made up by increasing taxes on corporate profits and excess savings. What are the short- and long-term effects of such a change?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter30: Government Budgets And Fiscal Policy

Section: Chapter Questions

Problem 42CTQ: Economist Arthur Laffer famously pointed out that, in some cases, income tax revenue can actually go...

See similar textbooks

Related questions

Q: In order to boost output, the federal government engages in fiscal policy, which government spending…

A: Hey, Thank you for the question. According to our policy, we can only answer 1 question per session.…

Q: Consider the economy of Cocoland, where citizens consume only coconuts. Assume that coconuts are…

A: When tax rate decreases as the amount subject to taxation increases, it is regressive taxation. When…

Q: Is it easier for governments to change taxes or spending plans? Why? What doesthis imply for policy?

A: Fiscal policies are the measures used by the government to affect the economy. The major fiscal…

Q: What policy might the federal government implement with regard to taxes and spending to help stop…

A: Fiscal policy refers to the changes in the federal government purchases and taxes, which are…

Q: According to classical economists, what are the reasons of fiscal policy not being effective in an…

A: Fiscal Policy refers to the use of policies related to taxation and public expenditure by the…

Q: Discuss examples of the different ways that the government intervenes in the economy.

A: Government intervenes refers to an action plan of government or public entity in order to have a…

Q: How an economist thinks that the economy works—is it self-regulating or not?—influences his opinion…

A: SELF REGULATING ECONOMY. Classical economists believe in self-regulating economy. Wage rate and…

Q: High tax rates that put money into the government's funds tend to slow spending, and ultimately slow…

A: Tax: The word tax refers to the compulsory payment which is imposed by the government. It is also an…

Q: An economist who believes the economy is self-regulating is more likely to advocate laissez-faire…

A: There are two schools of thought- (a) Classical School of Thought and (b) Keynesian School of…

Q: The economist views the budget as a public policy making tool? True or false

A: False. Reason- Economists view the budget as the opportunity cost. They see budget as the…

Q: A constitutional amendment has been proposed that would require Congress to balance the budget each…

A: Balanced budget is when the government expenditures is equal to its revenue.It is not possible to…

Q: Describe a situation in an economy that John Maynard Keynes would believe needs government support.…

A: John Maynard Keynes was the well-known economists whose theories and models are still studied and…

Q: Does MPC matter when using taxes to stimulate the economy in the short-run?

A: The stimulation of the economy using taxes involves fiscal policy. The expansionary/contractionary…

Q: Suppose the economy goes Int more while businesses wish to invest less. Suppose that at the same…

A: Recession refers to the contraction time period of the economy when there is a downturn phase. It…

Q: During the past five decades, there has been a shift in the composition of the federal budget toward…

A: The government budget represents the spending plans of the government of an economy for a given…

Q: Why does the budget require a forecast of the economy? Under what circumstances would actual…

A: A budget is a financial document or the financial plan of an economy which includes the planned…

Q: During a recession, the government can help the economy by a. decreasing taxes. b. buying…

A: During a recession, the government can help the economy by decreasing taxes as it will allow public…

Q: Someone criticizes the government for increasing interest rates but approving the increase in…

A: Fiscal policy is the policy used by government to achieve macroeconomic objectives without any…

Q: Explain how the government can use fiscal policy and monetary policy to reduce unemployment.

A: The government can influence the economy through fiscal policies, while the central bank can…

Q: Expenditures are always made with clear policy to guide them. Politics never enters the equation?…

A: Expenditures by the government for the economic growth involves the fiscal policy implementation, in…

Q: What is the market failure that justifies goverment involvement in the economy

A: Governments intervene in markets to deal with inefficiency. In an optimally efficient market,…

Q: Which economic policies affect a government's budget and include the increase or decrease the money…

A: Economic policies are policies or course of action taken by the government in the field of…

Q: Describe some fiscal policies that governments are presently using to counter the impact of…

A: The fiscal policy is used by the government or the finance ministry of the country to regulate the…

Q: For the last 50 years or so, republicans and democrats at the national level have each favored…

A: The impact of a tax cut, Increase spending, Higher economic growth, Government borrowing, government…

Q: What are some reasons that the economy might be in a recession, and what is the appropriate…

A: The recession is a period of low economic performance and it is caused due to low aggregate demand…

Q: What should government do with its spending and taxes during a recession? Why?

A: During a recession, taxes should be reduced and spending should be increased in order to trigger…

Q: what role does taxation and budget process play in government decisions?

A: The budget process is a very essential aspect of the decision-making process of the government.…

Q: what is the meaning of ripple effects and how does it affect an economy?

A: The ripple effect describes a situation where an initial decision or action taken by one individual…

Q: Fiscal policy can affect the rental cost of capital. true or false?

A: Fiscal policy is the use of government spending and taxation by the government to influence the…

Q: What effect an increase of government spending will have on the output equilibrium in the goods…

A: The autonomous spending is a part of total spending which is made by the government irrespective of…

Q: Are the gains achieved or losses incurred by delaying consumption?

A: Delaying consumption is gainful

Q: Logically discuss the impact of the increase in government taxes on consumption.

A: Taxes are the compulsory payments made by any firm or an individual to the government without having…

Q: Why does a balanced budget increase in spending and taxes increase aggregate demand?

A: balanced budget increase in spending and taxes mean that, both government spending (G) and taxes (T)…

Q: Analyze whether each of the following is primarily a microeconomic or a macroeconomic issue: a)…

A: Microeconomics in simple words we can say that it analysis or study the economic behaviour of the…

Q: Do tax cuts increase economic growth and taxable income so much that tax revenue increases?

A: Tax cuts are the fall in the amount of money of the taxpayers which are added to the revenue of the…

Q: An economist who believes the economy is self-regulating is more likely to advocate laissez-faire…

A: The self-regulating economy means that the economy does not need any special interference by any…

Q: On average, does an increase in taxes raise or lower real GDP? If taxes as a percent of GDP go up 1…

A: Since you have posted a question with multiple sub-parts, we will solve first three sub- parts for…

Q: If taxes are reduced , will most people save more or less than before ? Does national saving rise or…

A: The aggregate spending behaviors of families and public and private substances can swiftly influence…

Q: Hi! Can you help me understand why monetary and fiscal policies are important? macroeconomic tools…

A: 1. Why monetary and fiscal policies are important? 2. Macroeconomic tools used to stimulate…

Q: Suppose that the government wants to achieve higher output level and lower unemployment rate at the…

A: Fiscal policy is broadly defined as the policy regime undertaken by the government in order to…

Q: Imagine that a group of advisors to the president has suggested providing a tax cut for the middle…

A: Solution part (1). Suggested approach of providing a tax cut for middile class in order to…

Question

Government is considering a policy change to stimulate the economy by encouraging private consumption by reducing
sales taxes. The loss of tax revenue will be made up by increasing taxes on corporate profits and excess savings. What are
the short- and long-term effects of such a change?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Economist Arthur Laffer famously pointed out that, in some cases, income tax revenue can actually go up when tax rates go down. Why might this be the case?
Give typing answer with explanation and conclusion Suppose that the typical Canadian spends 80 percent of their income. There is an income tax rate is 15% per period. If the government wanted to see the effect of a tax cut of $50 billion, what would be the tax multiplier that they would have to use.
consumers increased consumption by a relatively small amount in 2008 and 2009 because thet believe the tax cuts temporary. true or false
If the government gives a $300 tax cut to everyone inthecountry,explainthemechanismbywhichthiswill cause interest rates to rise.
C = 450 + 0.4Y I = 350 G = 150 X = 70 Z = 35 + 0.1Y T = 0.15Y Yf = 1550 Q.2.5 Calculate what the new equilibrium income should be if the government of this country decides to cancel all taxes, implying the tax rate would now be 0%. Q.2.6 Before the government decreased the tax rate, how much of government spending was required to bring the economy to full employment?
Suppose that in an effort to reduce the deficit, it is decided that some luxuries should be heavily taxed. Suppose that you are asked to recommend one of two taxes: a 50% tax on the sale of old master paintings, or a 50% tax on yachts. Given that your goal is to minimize the dead weightloss, which of these two markets would you tax, and why? (Hint: Compare the demand and supply conditions.)
For questions #9, 10, 11, and 12 use the following equation. C = 20 + 0.2(Y – T) 9) What is the marginal propensity to save for this economy? a) 2% b) 20% c) 60% d) 80% ( plz show the equation and how you use the numbers from the equation to solve it)10) What is the tax multiplier for this economy? a) -0.25 b) 0.25 c) -1.25 d) 1.25 11) If the government increases taxes by 20, then how much will consumption change by? a) -5 b) 5 c) -25 d) 25 12) To increase real GDP by 40 the government needs to change government spending by a) 48 b) 40 c) 32 d) 20
The economy of Godzillaland is represented by the following:C=50+0.25Y d , T=1000, G=1000, I=100. (d) If the government increases taxes and spending by 50 what is the new equilibrium level of output? (e) Calculate the equilibrium level of output in case where taxes depend on income according to the following: T=-25+0.125Y.
Only typed answer Explain why the multiplier falls when taxes depend on income. .1 Assume the following for the economy of a country: a. Consumption function: C = 60 + 0.75Yd b. Investment: I = 75 c. Government spending: G = 45 d. Net taxes: T = - 25 + 0.2Y e. Disposable income: Yd. = Y - T f. Equilibrium: Y = C + I + G Solve for equilibrium income. How much does the government collect in net taxes when the economy is in equilibrium? What is the government’s budget deficit or surplus?
Suppose there is a bill to increase the tax on cigarettes by $1 per pack coupled with an income tax cut of $500. Suppose a person smokes an average of 500 packs of cigarettes per year—and would thus face a tax increase of about $500 per year from the cigarette tax at the person’s current level of consumption. The income tax measure would increase the person’s after-tax income by $500. Would the combined measures be likely to have any effect on the person’s consumption of cigarettes? Why or why not?
C = 450 + 0.4Y I = 350 G = 150 X = 70 Z = 35 + 0.1Y T = 0.15Y Yf = 1550 Calculate the tax revenue to the government of this country when the economy remains in equilibrium. Calculate what the new equilibrium income should be if the government of this country decides to cancel all taxes, implying the tax rate would now be 0%. Before the government decreased the tax rate, how much of government spending was required to bring the economy to full employment?
C = 450 + 0.4Y I = 350G = 150X = 70Z = 35 + 0.1Y T = 0.15YYf = 1550Calculate the tax revenue to the government of this country when the economy (2) remains in equilibrium.Calculate what the new equilibrium income should be if the government of this (6) country decides to cancel all taxes, implying the tax rate would now be 0%.Before the government decreased the tax rate, how much of government spending was required to bring the economy to full employment?