Part A Decide whether each of the following fiscal policies of the federal government is expansionary or contractionary. Write expansionary or contractionary, and explain the reasons for your choice. 1. The government cuts business and personal income taxes and increases its own spending. Expansionary. The decrease in personal income taxes increases disposable income and thus increases consumption spending. The business tax cut increases investment spending, and the increase in government spending increases government demand. 2. The government increases the personal income tax , Social Security tax and corporate income tax Government spending stays the same 3. Government spending goes up while taxes remain the same. 4. The government reduces the wages of its employees while raising taxes on consumers and businesses Other government spending remains the same # Effects of Fiscal Policy**Figure 30.1**The table below outlines various economic scenarios and their effects on fiscal policy.| Scenario | (A) Objective for Aggregate Demand | (B) Action on Taxes | (C) Action on Government Spending | (D) Effect on Federal Budget | (E) Effect on the National Debt ||----------|------------------------------------|---------------------|----------------------------------|-----------------------------|----------------------------------|| 1. National unemployment rate rises to 12 percent. | ↑ | | | | || 2. Inflation is strong at a rate of 14 percent per year. | | | | ↓ | || 3. Surveys show consumers are losing confidence in the economy, retail sales are weak, and business inventories are increasing rapidly. | | | | | Toward deficit || 4. Business sales and investment are expanding rapidly, and economists think strong inflation lies ahead. | | | | | || 5. Inflation persists while unemployment stays high. | | | | | ↓ |### Diagram Explanation:- The table presents five different economic conditions and their intended fiscal responses.- Column (A) indicates the targeted change in aggregate demand, such as increasing it (denoted by an arrow pointing up).- Columns (B) and (C) suggest possible fiscal policy actions, like changes in taxes or government spending, which are left blank in various scenarios.- Column (D) describes the potential effect on the federal budget, like moving towards a deficit.- Column (E) signals the effect on the national debt, with arrows indicating an increase or decrease.

The expansionary fiscal policy i.e. increase in public spending and reduction on taxes are the most…

Answered: Part A Decide whether each of the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Part A Decide whether each of the following fiscal policies of the federal government is expansionary or contractionary. Write expansionary or contractionary, and explain the reasons for your choice. 1. The government cuts business and personal income taxes and increases its own spending. Expansionary. The decrease in personal income taxes increases disposable income and thus increases consumption spending. The business tax cut increases investment spending, and the increase in government spending increases government demand. 2. The government increases the personal income tax , Social Security tax and corporate income tax Government spending stays the same 3. Government spending goes up while taxes remain the same. 4. The government reduces the wages of its employees while raising taxes on consumers and businesses Other government spending remains the same

# Effects of Fiscal Policy

**Figure 30.1**

The table below outlines various economic scenarios and their effects on fiscal policy.

| Scenario | (A) Objective for Aggregate Demand | (B) Action on Taxes | (C) Action on Government Spending | (D) Effect on Federal Budget | (E) Effect on the National Debt |
|----------|------------------------------------|---------------------|----------------------------------|-----------------------------|----------------------------------|
| 1. National unemployment rate rises to 12 percent. | ↑ | | | | |
| 2. Inflation is strong at a rate of 14 percent per year. | | | | ↓ | |
| 3. Surveys show consumers are losing confidence in the economy, retail sales are weak, and business inventories are increasing rapidly. | | | | | Toward deficit |
| 4. Business sales and investment are expanding rapidly, and economists think strong inflation lies ahead. | | | | | |
| 5. Inflation persists while unemployment stays high. | | | | | ↓ |

### Diagram Explanation:

- The table presents five different economic conditions and their intended fiscal responses.
- Column (A) indicates the targeted change in aggregate demand, such as increasing it (denoted by an arrow pointing up).
- Columns (B) and (C) suggest possible fiscal policy actions, like changes in taxes or government spending, which are left blank in various scenarios.
- Column (D) describes the potential effect on the federal budget, like moving towards a deficit.
- Column (E) signals the effect on the national debt, with arrows indicating an increase or decrease.

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