Which of the following Would Not Be an Example of Contractionary Fiscal Policy
Instead of cutting taxes, the government can seek economic expansion through spending increases (without corresponding tax increases). By building more highways, for example, it could increase employment and boost demand and growth. Fiscal policy is largely based on the ideas of the British economist John Maynard Keynes (1883-1946), who argued that economic recessions are due to a lack of consumer spending and business investment components in aggregate demand. Keynes believed that governments could stabilize the business cycle and regulate economic output by adjusting spending and fiscal policies to offset private sector deficits. His theories were developed in response to the Great Depression, which resisted the assumptions of classical economics that economic fluctuations correct themselves. Keynes` ideas were highly influential and led to the New Deal in the United States, which included massive spending on public works projects and social programs. To illustrate how the government can use fiscal policy to influence the economy, consider an economy in recession. The government could provide tax cuts to stimulate aggregate demand and stimulate economic growth. Growing deficits are among the complaints about expansionary fiscal policy, with critics complaining that a flood of red government ink can weigh on growth and possibly create the need for harmful austerity. Many economists simply deny the effectiveness of expansionary fiscal policy, arguing that public spending too easily crowds out private sector investment. 4. Which of the following fiscal policies is likely to be most effective when the economy has an inflation gap? Expansionary fiscal policy is generally characterized by deficit spending when government spending exceeds revenue from taxes and other sources.
In practice, deficit financing tends to result from a combination of tax cuts and increased spending. This means that to help stabilize the economy, the government would have to run large budget deficits during the economic downturn and run budget surpluses as the economy grows. This is called expansive or contractionary fiscal policy. In the face of rising inflation and other expansionary symptoms, a government can pursue a fiscal policy of contraction, perhaps even to the extent that a brief recession is triggered to restore balance to the business cycle. The government does this by raising taxes, cutting public spending, and cutting wages or jobs in the public sector. The founder of fiscal policy, John Maynard Keynes, argued that countries could use spending/tax policy to stabilize the business cycle and regulate economic output. 6. The U.S.
economy is currently suffering from a recession gap and a budget deficit. If the government wants to correct the recession, which of the following options best describes the appropriate fiscal policy, the impact on the solvent asset market, the interest rate and the U.S. dollar market? 5. Which of the following factors would likely slow down a country`s economic growth? Expansive politics is also popular — to a dangerous extent, some economists say. Fiscal stimulus is politically difficult to reverse. Whether or not it has the desired macroeconomic impact, voters like low taxes and public spending. Because of the policy incentives faced by policymakers, there tends to be a steady trend towards more or less constant deficit spending, which can be partially rationalized as “good for the economy.” When expansionary fiscal policy leads to deficits, fiscal policy of contraction is characterized by fiscal surpluses. However, this policy is rarely enforced because it is politically extremely unpopular. Policymakers are therefore faced with a great asymmetry in their incentives to pursue expansionary or contractionary fiscal policies. Instead, the preferred tool to curb unsustainable growth is usually the monetary policy of contraction or the rise in interest rates and the restriction of the supply of money and credit to contain inflation. 1. Which of the following examples would not be an example of restrictive fiscal policy? The logic behind this approach is that when people pay less tax, they have more money to spend or invest, resulting in higher demand.
This demand leads companies to hire more, reduce unemployment and compete harder with workers. This, in turn, serves to raise wages and provide consumers with more income to spend and invest. It`s a positive cycle or a positive feedback loop. Fiscal policy refers to the use of public spending and fiscal policy to influence economic conditions, particularly macroeconomic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth. In Keynesian economics, it is aggregate demand, or total spending, that drives the economy`s performance and growth. Total demand is made up of consumer spending, business investment spending, net government spending and net exports. According to Keynesian economists, the components of total private sector demand are too variable and too dependent on psychological and emotional factors to sustain sustainable economic growth. Eventually, economic expansion can spiral out of control – rising wages lead to inflation and asset bubbles begin to form. High inflation and the risk of widespread defaults when debt bubbles burst can cause serious damage to the economy, and this risk, in turn, causes governments (or their central banks) to turn the tide and try to “shrink” the economy. FISCAL POLICY ELIGIBLE FUNDS INTEREST MARKET FOR $ When private sector spending declines, the government can spend more and/or levy less taxes to directly increase aggregate demand. If the private sector is overly optimistic and spends too much and too quickly on consumption and new investment projects, the government can spend less and/or tax more to reduce aggregate demand.
Pessimism, fear, and uncertainty among consumers and businesses can lead to economic recessions and depressions, and excessive exuberance in good times can lead to an overheated economy and inflation. However, Keynesians believe that taxes and public spending can be managed rationally and used to counter the excesses and shortcomings of the private sector and investment spending in order to stabilize the economy. 2. Over a long period of economic expansion, tax revenues ____ and the amount spent on social assistance programs ____ were collected, creating a budget ____. 3. The crowding-out effect of government borrowing can be described as .. . . .