Question

Are tax cuts always directed at stimulating aggregate demand?

You must organize your responses in paragraphs, i.e., answers for question should be in paragraph 1, etc.

1) Discuss the three expansionary fiscal policy tools the government can use to expand an economy that is in a recession? Who implements fiscal policy? is congress, the treasury department? Provide some examples of the recent fiscal policy measures which were implemented when the U.S. economy went into recession in 2007 to 2010.

2) When Bill Clinton became President, taxes were increased for the top income bracket was raised and government spending was cut. Although these two measures are considered contractionary policies, the economy still boomed. What could explain this?

3) Beginning March 1, 2013, the Federal government and many state governments implemented the sequestration program. Do an internet search and find out what sequestration means. What is the effect of this sequestration on the aggregate demand and aggregate supply?


Solution Preview

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1) The government has policy tools that they can use to expand the economy while in a recession. The government implements the fiscal policy. Some of the fiscal policies that the government can use while the economy is in a recession include the lowering of taxes and the increased amount of government spending. Examples of the policies implemented include the first time homebuyers credit, new car tax deduction, and the $250 economic recovery payment. The American Recovery and Reinvestment Act were full of stimulus to keep the economy from going in to a depression. The theory behind the stimulus was to keep government spending up to keep construction and manufacturing sectors working. This gave the economy a slight boost to keep consumption steady. The lowering of taxes will increase the disposable income that consumers will have after they receive their paycheck. This will keep consumer spending steady during a recession...

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