Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 27: Problem 4

In \(2009,\) Congress and the president enacted "cash for clunkers" legislation that paid up to \(\$ 4,500\) to people buying new cars if they traded in an older, low-gas-mileage car. Was this legislation an example of fiscal policy? Does your answer depend on what goals Congress and the president had in mind when they enacted the legislation?

Short Answer

Expert verified
Yes, the 'cash for clunkers' legislation could be considered as an example of fiscal policy, as it involved increased government spending. However, the exact classification could depend on what the goals were behind enacting the legislation.

Step by step solution

01

Define Fiscal Policy

Fiscal policy involves changes in government spending and tax rates. It is mainly used by the government with the intention of stabilizing the economy during business cycles.
02

Assess 'cash for clunkers' legislation in context

The 'cash for clunkers' legislation provided monetary incentives to people for exchanging old low-mileage cars for new ones. This means the government essentially spent more money, hence increased their spending, to encourage this exchange.
03

Draw correlation between the legislation and Fiscal Policy

Given that Fiscal Policy incorporates changes in government spending and due to the 'cash for clunkers' legislation involving increased government spending, it can be said that this legislation indeed is an example of Fiscal policy.
04

Reflect upon the goals of the policy

If the aim was to stimulate the auto-industry or to increase consumer spending during a potential recession, then it was a Fiscal Policy. If the goal was to make the nation's car fleet more fuel-efficient and reduce carbon emissions, then it was more of an environmental policy. The classification of the policy may change depending on the context.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What is the cyclically adjusted budget deficit or surplus? Suppose that real GDP is currently at potential GDP, and the federal budget is balanced. If the economy moves into a recession, what will happen to the federal budget?

Economist Mark Thoma observed, "One of the difficulties in using fiscal policy to combat recessions is getting Congress to agree on what measures to implement.... Automatic stabilizers bypass this difficulty by doing exactly what their name implies." What are automatic stabilizers? Name two examples of automatic stabilizers and explain how they can reduce the severity of a recession.

As indicated in the chapter, the CBO forecast that real GDP would grow at an average annual rate of 1.9 percent from 2017 to 2027 . The Trump administration pledged to raise the growth rate to 3 percent, although some policymakers and economists were skeptical that this goal could be achieved. Yet from 1960 to \(1969,\) real GDP grew at an average annual rate of 4.5 percent. Briefly discuss the factors that make growth rates that high more difficult to achieve today.

Writing in the Wall Street Journal, Martin Feldstein, an economist at Harvard University, argued that "behavioral responses" of taxpayers to the cuts in marginal tax rates enacted in 1986 resulted in "an enormous rise in the taxes paid, particularly by those who experienced the greatest reductions in marginal tax rates." How is it possible for cuts in marginal tax rates to result in an increase in total taxes collected? What does Feldstein mean by a "behavioral response" to tax cuts?

What are the key differences between how we illustrate a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free