Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 32, Problem 3.1P
To determine
The problem with the supply side economics.
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- Most economists have reached the following conclusion about supply-side economics.
Supply-side tax cuts are likely to reduce income inequality.
Supply-side tax cuts are almost certain to lead to smaller budget deficits.
Supply-side tax cuts are likely to widen income inequality.
None of these.
Right now many economies in the world are experiencing a downturn due to the Corona Virus.a) What kind of fiscal policy can governments use to address the decline? b) What actions will be taken by the government in implementing the fiscal policy that you described in part a? c) What will be the effect on Aggregate Demand (if any) as a result of the actions taken in part b?d) What will be the effect on Aggregate Supply (if any) as a result of the actions taken in part b?
The Nobel prize winning economist Milton Friedman liked to tell this story:
There once was a town where thanks to expansive fiscal policy in Washington, the town had more money to fix roads and build bridges. The construction workers on those projects splurged on steak dinners every Friday, the meat for which they bought at the local butcher shop. The butcher was thrilled by increased sales of meat, as was the butcher's wholesale supplier. In fact, the butcher's supplier tried to put in bigger orders but it wasn't possible to buy more because the slaughterhouses were caught short, too. The result? Higher prices for meat got passed up from the slaughterhouse to the wholesaler to the butcher to the construction workers. With the possible exception of the owners of cattle, nobody was happy. Now a news reporter heard about surging steak prices in the town and decided to write a story about what was happening. Since the initial increase in meat prices was seen in the price of meat sold by…
Chapter 32 Solutions
Principles of Economics (12th Edition)
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- When supply-side economists propose cuts in tax rates, most mainstream economists are likely to take the position that they will be: Group of answer choices Effective because the supply-side effects will outweigh the demand-side effects Effective because the demand-side effects will outweigh the supply-side effects Ineffective because the demand-side effects will outweigh the supply-side effects Ineffective because the demand-side and supply-side effects will offset each otherarrow_forwardWhich of the following statements is correct? A decrease in the size of a tax always decreases the tax revenue raised by that tax. A decrease in the size of a tax always decreases the deadweight loss of that tax. Tax revenue decreases when there is a small decrease in the tax rate and the economy is on the downward-sloping part of the Laffer curve. An increase in the size of a tax leads to an increase in the deadweight loss of the tax only if the economy is on the upward-sloping part of the Laffer curve.arrow_forwardDefine the Tax Multiplier and the Balanced Budget Multiplier.arrow_forward
- Match each of the following with the appropriate Fiscal Policy Should be used when Unemployment is High Should be used when Inflation is High Will increase GDP and Lower Unemployment Will decrease GDP and lower price levels or Inflation :: Expansionary Fiscal Policy :: Contractionary Fiscal Policyarrow_forwardImagine that a group of advisors to the president has suggested providing a tax cut for the middle class in order to stimulate the economy and reduce unemployment. The president has asked for your analysis of this proposed tax cut. Post your thoughts both as an economic scientist and economic policy advisor. Read the scenario and, respond to the following: Describe how an economic scientist would approach the tax cut recommended by the advisors in the scenario you just read. What are some economic factors that the economic scientist would consider when crafting his or her statement on the tax cut proposed? Describe how an economic policy advisor would approach the same tax cut and provide the reasoning behind the position. Remember to think like an economist scientist and economic policy advisor when you write your post, even if it goes against your own opinions about whether a tax cut is a good idea. To guide your responses, consider the following questions: What economic…arrow_forwardWhy do Republicans like tax cuts? Why are tax cuts a good thing? How does it affect the aggregate supply and demand graph?arrow_forward
- Why does a balanced budget increase in spending and taxes increase aggregate demand?arrow_forwardWhy do critics charge that fiscal policy has a “big-government bias”?arrow_forwardUsing the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy. PRICE LEVEL 130 20 120 110 100 90 80 Aggregate Demand 70 + + 0 10 20 30 OUTPUT 40 50 60 Aggregate Demand ? Suppose the governments of two very similar economies, economy Y and economy Z, implement a permanent tax cut of equal size. The marginal propensity to consume (MPC) in economy Y is 0.85 and the MPC in economy Z is 0.8. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with thearrow_forward
- Economist Arthur Laffer famously pointed out that, in some cases, income tax revenue can actually go up when tax rates go down. Why might this be the case? Did it happen following the tax cuts of 2017?arrow_forwardIn 1989, Senator Bob Packwood asked Congress’s Joint Committee on Taxation how much extra revenue the government would raise if it just started taxing 100% of all income over $200,000 per year. The Joint Committee crunched some numbers and reported an answer: $204 billion per year. a. What is wrong with this answer? In 1989, very few people made over $200,000 a year, so the estimate of the tax revenue is far too high. Increasing government spending by $204 billion each year would have generated economic growth, and subsequently even higher amounts of tax revenues. The Joint Committee on Taxation did not have the tools needed to make such an estimate accurately. No one would have an incentive to work once they had earned $200,000, so much of the taxable income would disappear.arrow_forwardBriefly explain the meaning of internal balance or government balanced budget.arrow_forward
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