FISCAL POLICY: GOVERNMENT SPENDING AND TAXATION
Why is government spending the same as investment or consumption spending?
- Because C, G, and I will directly enter the spending stream and are received as income.
Why does a decrease in taxes have a smaller multiplier effect than the same increase in government spending?
- Because a decrease in T initially increases C by a smaller amount.
If the government wants to spend more without increasing equilibrium income, by how much must it increase taxes (as compared to the increase in government spending)?
- It would have to increase T more than G.
How does the income tax affect the size of the spending multiplier?
- It makes the spending multiplier smaller.
Why isn’t the actual deficit a good guide to how active the government’s fiscal policy is?
- The size of the actual deficit in a recession will be larger because of the effects of the automatic stabilizers. To measure the active component of fiscal policy these effects must be removed.
If government borrowing reduces business borrowing, how does this affect our economy’s growth?
- It reduces future growth.
If the public anticipates having to pay the future taxes implicit in any deficit, why won’t a lower tax increase consumption spending (and aggregate demand)?
- Because households will regard less taxes how as more taxes later, they will save an amount equal to the delayed tax. C will be unchanged.
Why is government spending (G) an injection? Why are taxes (T) a leakage?
- G adds to total spending, while T represents an allocation of income away from spending.
Will the multiplier effect of more government spending be larger or smaller when prices go up as output increases?
- Smaller.
How do built-in stabilizers help stabilize the economy?
- They reduce the multiplier effects of changes in autonomous spending.
http://econommicslessons.blogpot.com
http://become-debt-free.blogspot.com
http://humorandwit.blogspot.com
