Determine whether each of the following is an example of discretionary fiscal policy action.
a. A recession occurs, and government-funded unemployment compensation is paid to laid-off workers.
b. Congress votes to fund a new jobs program designed to pat unemployed workers to work.
c. The Federal Reserve decides to reduce the quantity of money in circulation in an effort to slow inflation.
d. Under powers authorized by an act of Congress, the president decides to authorize an emergency release of funds for spending programs intended to head off economic crises.
a) This situation is not a suitable example of discretionary policy action
b) This situation is an example of discretionary policy action
c) This situation is not a suitable example of discretionary policy action
d) This situation is an example of discretionary policy action
The given is the situation of the discretionary Fiscal policy actions
The objective is to determine the situations are the example of the policy actions
No, this is not an instance of discretionary budgetary policy. This is due to the fact that unemployment compensation is a special automatic fiscal policy that is provided to laid-off workers.
And, without government intervention, such automatic stabilizers will produce shifts in aggregate demand.
(b) Yes, this is an example of discretionary fiscal policy because the government took voluntary action to pursue a new economic goal of providing jobs for unemployed persons.
(c) This is not an example of fiscal policy with discretion. Because such measures of an increase or decrease in the quantity of money in circulation are referred to as monetary policy rather than fiscal policy, they are referred to as such.
When the economy is hit by inflation, the Federal Reserve reduces the amount of money in circulation to combat it.
(d) This is an example of discretionary fiscal policy since the president used discretionary authority to allow the flow of emergency money for the purpose of spending scheduled projects to avoid economic emergencies.
As a result, it contributes to the achievement of national economic objectives.
A government is currently operating with an annual budget deficit of billion. The government has determined that every billion reduction in the amount it borrows each year would reduce the market interest rate by percentage point. Furthermore, it has determined that every -percentage-point change in the market interest rate generates a change in planned investment expenditures in the opposite direction equal to billion. The marginal propensity to consume is . Finally, the government knows that to eliminate an inflationary gap and take into account the resulting change in the price level, it must generate a net leftward shift in the aggregate demand curve equal to billion. Assuming that there are no direct expenditure offsets to fiscal policy, how much should the government increase taxes? (Hint: How much new private investment spending is induced by each billion decrease in government spending? )
Assume that MPC = when answering the following questions.
a. If government expenditures rise by $ 1 billion, by how much will the aggregate expenditure curve shift upward?
b. If taxes rise by $ 1 billion, by how much will the aggregate expenditure curve shift downward?
c. If both taxes and government expenditures rise by $ 1 billion, by how much will the aggregate expenditure curve shift? What will happen to the equilibrium level of real GDP?
d. How does your response to the second question in part (c) change if MPC = ? If MPC = ?
Recall that the Keynesian spending multiplier equals 1 /(1-MPC). Suppose that in panel (b) of Figure 13-1, the government knows that the MPC is equal to 0.75 and that the amount of the horizontal distance that the AD curve had to be shifted directly leftward from point E1 was equal to $1.0 trillion. What is the reduction in real government spending required to have generated this shift?
94% of StudySmarter users get better grades.Sign up for free