In an IS-LM model, consider a policymaker who wants to implement an expansion- ary fiscal policy to promote an increase in national GDP. He can choose between a 3% increase in public spending or a 3% reduction of taxes (lump-sum). Which option would be more effective? Why? Is there anything the central bank can do in order to enhance the effects of fiscal policy? Why?

In an IS-LM model, consider a policymaker who wants to implement an expansion- ary fiscal policy to promote an increase in national GDP. He can choose between a 3% increase in public spending or a 3% reduction of taxes (lump-sum). Which option would be more effective? Why? Is there anything the central bank can do in order to enhance the effects of fiscal policy? Why?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

In an IS-LM model, consider a policymaker who wants to implement an expansion-
ary fiscal policy to promote an increase in national GDP. He can choose between
a 3% increase in public spending or a 3% reduction of taxes (lump-sum). Which
option would be more effective? Why? Is there anything the central bank can do
in order to enhance the effects of fiscal policy? Why?

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Step 1: Understand the IS-LM model and expansionary fiscal policy

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Step 2: Analyze the impact of increased public spending

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Step 3: Assess the consequences of a tax reduction

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Step 4: Consider the Multiplier effect

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Step 5: Examine the role of the central bank

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Step 6: Conclude with a Recommendation

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