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Chapter 13: Supply Side Fiscal Policy (page 264)

How are supply-side policies implemented and what types of supply-side policies are used?

Short Answer

Expert verified

Reduction of taxation

Interventionist

Non-Interventionist

Step by step solution

01

Supply-Side Fiscal Policy

Similarly to boost aggregate demand, the reduction of taxation levels can be used to promote economic growth, however, the main objective in mind is to give consumers, laborers more incentives to save, work more productively and invest more.

We differentiate between 2 types of policies on supply side,

Interventionist and

Non-Interventionist

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Most popular questions from this chapter

Last year, while a hypothetical economy was in a recession, government spending was \(595 billion, and government revenue was \)505 billion. Economists estimate that if the economy had been at its full employment level of GDP last year, government spending would have been \(555 billion and government revenue would have been \)550 billion. Which of the following statements about this government’s fiscal situation are true?

  1. The government has a non–cyclically adjusted budget deficit of \(595 billion.

  2. The government has a non–cyclically adjusted budget deficit of \)90 billion.

  3. The government has a non–cyclically adjusted budget surplus of \(90 billion.

  4. The government has a cyclically adjusted budget deficit of \)555 billion.

  5. The government has a cyclically adjusted budget deficit of \(5 billion.

  6. The government has a cyclically adjusted budget surplus of \)5 billion.

Briefly state and evaluate the problem of time lags in enacting and applying fiscal policy. Explain the idea of a political business cycle. How might expectations of a near-term policy reversal weaken fiscal policy based on changes in tax rates? What is the crowding-out effect, and why might it be relevant to fiscal policy?

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

  1. the worst possible combination of tax and expenditure changes.

  2. the best possible combination of tax and expenditure changes.

  3. a mediocre and contradictory combination of tax and expenditure changes.

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?

  1. Yes

  2. No

Trace the cause-and-effect chain through which financing and refinancing of the public debt might affect real interest rates, private investment, the capital stock, and economic growth. How might investment in public capital and public-private complementarities alter the outcome of the cause-effect chain?
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