q7. If Congress wanted to implement a tax cut during a recession but had to keep...

q7. If Congress wanted to implement a tax cut during a recession but had to keep a balanced budget, what would they need to do?

The government would have to cut taxes in another area.
The government would have to increase spending.
The government would have to reduce spending.

q8. Assume the government has a budget deficit and that the economy is experiencing a period of growth higher than predicted. Tax revenues collected by the government are likely to ________, which would ________

decrease; increase the budget deficit
increase; increase the budget deficit
increase; reduce the budget deficit

Expert Solution

Fiscal policy is used by the government and for fiscal policy government either change government expenditure or change in the taxes.

In Contractionary fiscal policy, therefore government either decreases the government spending or increase tax.

Since the expansionary fiscal policy means either an increase in the government expenditure or decrease in the tax. This policy is used for increasing aggregate demand.

Since a recession is the time period of the economy in which the price level is quite low and the demand for goods and services is also very low. So the unemployment rate is very high, therefore the purchasing power is very low. Therefore there is a need for government intervention by increasing its expenditure and decreasing tax rate. So that aggregate demand could increase.

So if Congress wanted to implement a tax cut during a recession but had to keep a balanced budget, the government would have to reduce spending. This is because government budget will be balanced when tax revenue and government expenditure are equal.

Hence option third is the correct answer.

2.

Assume the government has a budget deficit and that the economy is experiencing a period of growth higher than predicted. Tax revenues collected by the government are likely to increase, which would reduce the budget deficit.

This is because when economy is growing, then the tax collection will increase because people have higher income. So the budget deficit will decrease.

Hence option third is the correct answer.

Rahul Sunny answered 1 year ago

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