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Chapter 13: Types of Fiscal Policy (page 264)

What happens to the taxation and government spending rates during an expansionary fiscal policy?

Short Answer

Expert verified

Reduction of taxes and increased government spending

Step by step solution

01

Types of Fiscal Policy

The government reduces the level of taxation for its households and increases overall government spending on aspects like infrastructure to promote economic activity and growth.

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Most popular questions from this chapter

Refer back to the table in Figure 12.7 in the previous chapter. Suppose that aggregate demand increases such that the amount of real output demanded rises by \(7 billion at each price level. By what percentage will the price level increase? Will this inflation be demand-pull inflation, or will it be cost-push inflation? If potential real GDP (that is, full-employment GDP) is \)510 billion, what will be the size of the positive GDP gap after the change in aggregate demand? If government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase government spending or decrease it?

Real Output Demanded (Billions)
Price Level (Index Number)

Real Output Supplied (Billions)
\(506
108\)513
508104512
510100510
51296507
51492502

Refer to the following table for Waxwania:

What is the marginal tax rate in Waxwania? The average tax rate? Which of the following describes the tax system: proportional, progressive, or regressive?

Assume that a hypothetical economy with an MPC of .8 is experiencing a severe recession. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? Determine one possible combination of government spending increases and tax decreases that would accomplish the same goal.

Which of the following would help a government reduce an inflationary output gap?

  1. Raising taxes

  2. Lowering taxes

  3. Increasing government spending

  4. Decreasing government spending

What is the relationship between the multiplier and the AD component of government spending?
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