Question

What happens to the aggregate demand curve when government spending is increased by $100 million, and the government raises income taxes $100 million in the same month to pay for the transfer payments?   Take your time; draw it out; use the book.

Why might they spend less one month than another month?

LIST THE THREE FISCAL POLICY ACTIONS THE FEDERAL GOVERNMENT CAN DO TO REDUCE AGGREGATE DEMAND TO LESSEN INFLATION.

LIST THE THREE FISCAL POLICY ACTIONS THE FEDERAL GOVERNMENT CAN DO TO INCREASE AGGREGATE DEMAND TO LESSEN UNEMPLOYMENT.

.   A CONSTITIONAL AMENDMENT HAS BEEN PROPOSED THAT WOULD REQUIRE CONGRESS TO BALANCE THE BUDGET EACH YEAR. IS IT POSSIBLE TO BALANCE THE BUDGET EACH YEAR? IS IT DESIRABLE? (THIS IS AN OPINION QUESTION) LIST 3 PROS AND 3 CONS FOR YOUR ANSWER

Answer 1

If government increases its spending in the economy, then there will be increase in the level of aggregate demand and growth in the economy. But increase in taxes by the government by same level will reduce the disposable income in the hands of the people, shifting the level of aggregate demand back to the same level. So there will not be much effect on aggregate demand with increase in government spending and tax by same amount.

Government spending might be high in one month and low in the other month because of difference in the number of programs and policies, investment started by the government in different time periods. More policies and more investment will lead to more spending.

Three fiscal policies that will lessen aggregate demand level are:

• Increase the level of tax to reduce disposable income in hands of people. This will reduce level of aggregate demand.
• Government spending should be reduced which will also reduce level of aggregate demand.
• Reduction in transfer payments will also reduce level of aggregate demand.

Three fiscal policies to increase aggregate demand to reduce unemployment are:

• Government spending should be increased to increase level of aggregate demand to increase level of output and employment level.
• Tax rate should be reduced to increase level of aggregate demand which will lead to increase level of employment
• Transfer payments by the government should be increased to increase level of aggregate demand.

No, it is not possible to balance the budget every year. It is not even desirable to balance the budget each year.

Pros of having unbalanced budget:

• Situations of inflation and deflation in the economy can be tackled with unbalanced budget.
• Situation of full employment can be achieved with unbalanced budget.
• It is effective at the time of war and emergency to make policies for betterment of the economy.

Cons of having unbalanced budget:

• It will lead to instability in the economy especially financial.
• Not having unbalanced budget might lead to wasteful expenditure by the government.
• It will lead to recurring debt if expenditure is more than receipts.