Principles of Economics
Principles of Economics
7th Edition
ISBN: 9781305156043
Author: N. Gregory Mankiw
Publisher: Cengage Learning US
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Chapter 36, Problem 1QR
To determine

Lags in the effect of monetary and fiscal policies.

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Explanation of Solution

Monetary policy affects aggregate demand primarily by changing interest rates. However, mostly households and firms set their spending plans in advance and as a result, there is time lag for changes in interest rate to alter the aggregate demand for goods and services. Also, the fiscal policy works with a lag since they are slowed by long political processes that govern changes in spending and taxes. Due to these long lags, it is more difficult to engage in an active stabilization policy, as the economy will not respond immediately to policy changes. Thus, long lags suggest a policy that is passive rather than active because the economy works with a lag; since the ability to forecast future economic conditions is poor, it may result in the attempts to stabilize the economy in the opposite manner (may result in destabilization).

Economics Concept Introduction

Concept introduction:

Monetary policy: Monetary policy refers to the credit control system adopted by the central bank of a country with an aim to achieve its macroeconomic policy objectives.

Fiscal Policy: Fiscal policy deals with the taxation and expenditure decisions of the government that influence a nation’s economy.

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Discuss the preferred deterrent method employed by the Zambian government to combat tax evasion, monetary fines. As noted in the reading the potential penalty for corporate tax evasion is a fine of 52.5% of the amount evaded plus interest assessed at 5% annually along with a possibility of jail time. In general, monetary fines as a deterrent are preferred to blacklisting of company directors, revoking business operation licenses, or calling for prison sentences. Do you agree with this preference? Should companies that are guilty of tax evasion face something more severe than a monetary fine? Something less severe? Should the fine and interest amount be set at a different rate? If so at why? Provide support and rationale for your responses.
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Discuss the preferred deterrent method employed by the Zambian government to combat tax evasion, monetary fines. As noted in the reading the potential penalty for corporate tax evasion is a fine of 52.5% of the amount evaded plus interest assessed at 5% annually along with a possibility of jail time. In general, monetary fines as a deterrent are preferred to blacklisting of company directors, revoking business operation licenses, or calling for prison sentences. Do you agree with this preference? Should companies that are guilty of tax evasion face something more severe than a monetary fine? Something less severe? Should the fine and interest amount be set at a different rate? If so at why? Provide support and rationale for your responses.
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