Chapter 13: Supply Side Fiscal Policy (page 264)
How are supply-side policies implemented and what types of supply-side policies are used?
Reduction of taxation
Interventionist
Non-Interventionist
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
What happens to the taxation and government spending rates during an expansionary fiscal policy?
Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap (Figure 11.7). Explain how equal-size increases in G and T could eliminate a recessionary gap and how equal-size decreases in G and T could eliminate an inflationary gap.
(For students who were assigned Chapter 11) Assume that, without taxes, the consumption schedule for an economy is as shown below:
| GDP, Billions | Consumption, Billions |
| \(100 | 120 |
| 200 | 200 |
| 300 | 280 |
| 400 | 360 |
| 500 | 440 |
| 600 | 520 |
| 700 | 600 |
Graph this consumption schedule. What is the size of the MPC?
Assume that a lump-sum (regressive) tax of \)10 billion is imposed at all levels of GDP. Calculate the tax rate at each level of GDP. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.
Now suppose a proportional tax with a 10 percent tax rate is imposed instead of the regressive tax. Calculate and graph the new consumption schedule, and calculate the MPC and the multiplier.
Finally, impose a progressive tax such that the tax rate is 0 percent when GDP is \(100, 5 percent at \)200, 10 percent at \(300, 15 percent at \)400, and so forth. Determine and graph the new consumption schedule, noting the effect of this tax system on the MPC and the multiplier.
Use a graph similar to Figure 13.3 to show why proportional and progressive taxes contribute to greater economic stability, while a regressive tax does not.
During the recession of 2007–2009, the U.S. federal government’s tax collections fell from about \(2.6 trillion down to about \)2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?
Yes
No
The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand and raising taxes simultaneously to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is
the worst possible combination of tax and expenditure changes.
the best possible combination of tax and expenditure changes.
a mediocre and contradictory combination of tax and expenditure changes.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
