its budget. What happens this year if the government announces that it will increase its spending or infrastructure in five years (select all the correct statements)? (a) A future increase in government spending can only affect the economy in the future. (b) The income tax rate will decline in five years. (c) If Ricardian Equivalence holds, short-run output is likely to decline right away. (d) Lifetime income after taxes will increase. (e) If Ricardian Equivalence holds, consumption is likely to decline right away.

its budget. What happens this year if the government announces that it will increase its spending or infrastructure in five years (select all the correct statements)? (a) A future increase in government spending can only affect the economy in the future. (b) The income tax rate will decline in five years. (c) If Ricardian Equivalence holds, short-run output is likely to decline right away. (d) Lifetime income after taxes will increase. (e) If Ricardian Equivalence holds, consumption is likely to decline right away.

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter36: Six Debates Over Macroeconomic Policy

Section: Chapter Questions

Problem 6PA

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Similar questions

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6. Explain how built-in (or automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy's built-in stability? In a phrase, “net tax revenues vary directly with GDP." When GDP is rising so are tax collections, both income taxes and sales taxes. At the same time, government payouts-transfer payments such as unemployment compensation, and welfare-are ( increasing, decreasing). Since net taxes are taxes less transfer payments, net taxes definitely (rise, fall) with GDP, which dampens the rise in GDP. (Note: Net Taxes = Taxes – Transfer Payments) On the other hand, when GDP drops in a recession, tax collections slow down or actually diminish while transfer payments ( rise, fall ) quickly. Thus, net taxes ( increase, decrease ) along with GDP drops, which softens the decline in GDP. A ( progressive, proportional, regressive ) tax system would have the most stabilizing effect of the three tax systems and the…
2. The government decreases current taxes, while holding government spending in the present and the future constant. (a) Using diagrams, determine the equilibrium effects on consumption, investment, the real interest rate, aggregate output, employment, and the real wage. What is the multiplier, and how does it differ from the government expenditure multiplier? (b) Now suppose that there are credit market imperfections in the market for consumer credit, for example due to asymmetric information in the credit market. Repeat part (a) and explain any differences in your answers in parts (a) and (b). Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
2. Explain the aspects of expansionary and contractionary fiscal policy. During which phases of the business cycle would each be appropriate? Expansionary fiscal policy refers to (increases, decreases) in government spending or (increases, decreases) in taxes or both, so that the net effect on aggregate demand (AD) is an increase in net government spending (G). Contractionary fiscal policy is the opposite: a(n) (increase, decrease) in government spending or (increase, decrease) in taxes or both, so that the net effect on aggregate demand is a decrease in net government spending. Expansionary policy would most likely be used during a r A contractionary policy would most likely be employed near the (peak, trough ) of the business cycle as the economy reaches full-employment GDP and the potential for inflation accelerates. or (peak, trough ) phase.
'The U.S., world's largest economy, went into recession in February of 2020. It has taken a broad range of steps to combat the economic disruption caused by COVID-19. In response to this crisis, governments have enacted sweeping and sizable fiscal stimulus of trillions of dollars.' Is it an appropriate policy response if the primary responsibility of the government is to maintain economic growth? Explain the significance of Fiscal policy for an economy? Is there any difference in the two approaches of fiscal expansion through - direct transfer benefit and government spending directly on purchase of goods and services that may influence real GDP? What role does multiplier play? Explicate. Support your answer with the suitable diagram/s.
3. The balanced budget multiplier For both political and macroeconomic reasons, governments are often reluctant to run budget deficits. Here, we examine whether policy changes in G and T that maintain a balanced budget are macro economically neutral. Put another way, we examine whether it is possible to affect output through changes in G and T so that the government budget remains balanced. Start from equation (3.8): Y=k, +i+G-c7] 1-G a. When G increases by one unit, Y increases by, b. When T increases by one unit, Y increases by Suppose that the economy starts with a balanced budget: G =T. Suppose that Gand T increase by one unit each. Using your answers to (a) and (b), the change in . Is balanced budget changes in G and Tmacroeconomically Y equals_ neutral? (yes or no)
2. Show graphically that tax cuts are a less effective fiscal policy tool the greater the sensitivity of investment to interest rates.
1. combine the budget constraints of the consumer and government to demonstrate that the timing of taxes doesn't affect the timing of consumption in the two-period model, thus establishing that the Ricardian equivalence theorem holds. • Specifically: Report down and label the consumer's budget constraint and the government's budget constraint in the current and future period and then combine them, showing your work by labelling this step. When you have arrived at a point where you can show that Ricardian equivalence holds circle your answer and write a (at most) brief description of how to interpret your result. 2.Relate the permanent income hypothesis to the Ricardian equivalence theorem.