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Chapter 13: Types of fiscal policy (page 264)
What happens between the public and private sectors during a "crowding out" effect?
The public sector displaces the private sector
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What do economists mean when they say Social Security and Medicare are “pay-as-you-go” plans? What are the Social Security and Medicare trust funds, and how long will they have money left in them? What is the key long-run problem of both Social Security and Medicare? To fix the problem, do you favor increasing taxes or do you prefer reducing benefits?
(For students who were assigned Chapter 11) Assume that, without taxes, the consumption schedule for an economy is as shown below:
| GDP, Billions | Consumption, Billions |
| \(100 | 120 |
| 200 | 200 |
| 300 | 280 |
| 400 | 360 |
| 500 | 440 |
| 600 | 520 |
| 700 | 600 |
Graph this consumption schedule. What is the size of the MPC?
Assume that a lump-sum (regressive) tax of \)10 billion is imposed at all levels of GDP. Calculate the tax rate at each level of GDP. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.
Now suppose a proportional tax with a 10 percent tax rate is imposed instead of the regressive tax. Calculate and graph the new consumption schedule, and calculate the MPC and the multiplier.
Finally, impose a progressive tax such that the tax rate is 0 percent when GDP is \(100, 5 percent at \)200, 10 percent at \(300, 15 percent at \)400, and so forth. Determine and graph the new consumption schedule, noting the effect of this tax system on the MPC and the multiplier.
Use a graph similar to Figure 13.3 to show why proportional and progressive taxes contribute to greater economic stability, while a regressive tax does not.
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?
What is the role of the Council of Economic Advisers (CEA) as it relates to fiscal policy? Use an Internet search to find the names and university affiliations of the present members of the CEA.
How are supply-side policies implemented and what types of supply-side policies are used?
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