Suppose the president proposes an $800 billion economic stimulus package intended to create jobs. A major criticism of this new spending proposal is that it is not matched by a tax increase. Assume the U.S. economy is below full employment, and Congress has passed a law requiring that any increase in spending be matched or balanced by an equal increase in taxes. The MPC is 0.75, and aggregate demand must be increased by $1,000 billion to reach full employment. Will the economy reach full employment if Congress increases spending by $800 billion and increases taxes by the same amount? True or False: If Congress increases spending by $800 billion and increases taxes by the same amount, the economy will not reach full employment. True

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Q: The federal government decides to stimulate the economy and increases government expenditure on new…

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Fiscal Policy and Money Market

Fiscal policy is one of the important tools that is used by the government to control inflation or aggregate demand in the economy. Under this policy, there are two rules which are used by the government, one is the expenditure of the government and the other is the taxation or income of the government which it collects from the public.