Chapter 20, Problem 1CYU

a)

To determine

Whether the policy is a contractionary fiscal policy or an expansionary fiscal policy when several military bases are closed?

Explanation of Solution

It is a contractionary fiscal policy because when there is a decrease in aggregate demand due to an increase in tax rate and low government spending then it would be a contractionary fiscal policy. Here, in this case, when military bases are closed, then there would be a decrease in government spending which means it is a contractionary fiscal policy.

Economics Concept Introduction

Introduction: Fiscal policy is a policy through which government spending and tax policies are used to make economic conditions better.

Expansionary fiscal policy refers to the increase in government spending on projects or schemes which improve the life of society or offer better infrastructure facilities such as tax cuts, rebates, etc., and contractionary fiscal policy increase the tax rate.

b)

To determine

Whether the policy is a contractionary fiscal policy or an expansionary fiscal policy for an increase in the number of weeks, an unemployed person gets unemployment benefits.

Explanation of Solution

It is an expansionary fiscal policy because when there is an increase in aggregate demand due to a decrease in tax rate and high government spending then it would be an expansionary fiscal policy. Here, in this case, when the number of weeks increases, government expenditure would also increase and these unemployment benefits help the people to maintain their basic consumption level in the economy. Therefore, it is an expansionary fiscal policy.

Economics Concept Introduction

Introduction: Fiscal policy is a policy through which government spending and tax policies are used to make economic conditions better.

Expansionary fiscal policy refers to the increase in government spending on projects or schemes which improve the life of society or offer better infrastructure facilities such as tax cuts, rebates, etc., and contractionary fiscal policy increase the tax rate.

c)

To determine

Whether the policy is a contractionary fiscal policy or an expansionary fiscal policy when the federal tax on gasoline increases?

Explanation of Solution

It is a contractionary fiscal policy because when there is a decrease in aggregate demand due to an increase in tax rate and low government spending, it would be a contractionary fiscal policy. Here, in this case, when the federal tax on gasoline increases, then there would be a decrease in the disposable income of individuals in the economy which cause a fall in consumption level and aggregate demand. Therefore, it is a contractionary fiscal policy.

Economics Concept Introduction

Introduction: Fiscal policy is a policy through which government spending and tax policies are used to make economic conditions better.

Expansionary fiscal policy refers to the increase in government spending on projects or schemes which improve the life of society or offer better infrastructure facilities such as tax cuts, rebates, etc., and contractionary fiscal policy increase the tax rate.