Question

Fiscal Policy

Part 1 - Check Your Understanding-​ ​ U​ se the information in the paragraph to answer the questions. Assume that policymakers believed that the marginal propensity to consume (MPC) was 0.9.

Following the announcement in December 2008 that the U.S. economy had been in a recession since December 2007, Congress and President Obama passed the A​merican Recovery and Reinvestment Act (ARRA) into law in February 2009. The ARRA cut taxes by $288 billion, increased government spending by $275 billion, and increased transfer payments by $224 billion. Although not fully implemented, the majority of the government spending would take place in 2010 and 2011.

1. Was the ARRA an example of discretionary fiscal policy or nondiscretionary fiscal policy? Explain.
2. Fiscal policy is sometimes criticized for having an implementation gap. Give evidence of an implementation gap from the information in the paragraph.
3. Calculate the maximum increase in GDP that could result from the tax cut. Show your work.
4. Calculate the maximum increase in GDP that could result from the increase in government spending. Show your work.

5. Calculate the maximum increase in GDP that could result from the increase in government transfers. Show your work.

6. Based on your calculations, what is the maximum change in spending from the AARA? Show your work.

7. Predict how the ARRA affected the national debt. Explain your reasoning.

Answer 1

• ARRA was an example of discretionary fiscal policy or nondiscretionary fiscal policy because Discretionary economic policy uses two tools. they're the budget process and therefore the tax code. the primary tool is that the discretionary portion of the U.S. budget. Congress determines this sort of paying with appropriations bills annually . the most important is that the military budget. All other federal departments are a part of discretionary spending too.The budget also contains mandatory spending. This includes payments from Social Security , Medicare, Medicaid, Obamacare and interest payments on the debt . Congress mandates these programs. they're the law of the land. Congress must vote to amend or revoke the relevant law to vary these programs. Therefore, changes within the mandatory budget are very difficult. For that reason, it is not a tool of discretionary economic policy .The second tool is that the tax code.. Only Congress has the facility to vary the tax code. Congress’ changes to the tax code has got to be done by enacting new laws. These laws must be gone by both the Senate and therefore the House of Representatives. But the president has the facility to vary how tax laws are implemented. He can send directives to the interior Revenue Service to regulate the enforcement of rules and regulations.
• Fiscal policy is sometimes criticized for having an implementation gap because When the govt cuts taxes, it puts money directly into the pockets of business and families. they need extra money to spend. This also boosts demand and drives growth. When spending and tax cuts are done at an equivalent time, it puts the pedal to the metal. That's why the Economic Stimulus Act ended the good Recession in only a couple of months. It used a mixture of structure , tax cuts, and unemployment benefits to save lots of or create 640,000 jobs between March and October 2009. Studies show that unemployment benefits are the simplest stimulus..

• The FY 2011 budget also allocated $64 billion, weakened as follows:

  $33 billion in tax credits for little businesses that add new workers or give raises beyond a cost-of-living increase.
  Raise the limit on SBA loan guarantees
  $30 billion from the TARP program for 8,000 community banks. These banks own assets under $10 billion and do half all small business lending.
  $700,000 in order to eliminate capital gains taxes for investors in small and medium businesses.

• The debt is that the public and intragovernmental debt owed by the federal . It’s also called sovereign debt, country debt, or government debt.It consists of two sorts of debt. the primary is debt held by the general public . the govt owes this to buyers of its bonds. These buyers are the country’s people, international investors, and foreign governments.The second type is intragovernmental debt. The federal owes this to other government departments. It often funds government and citizens’ pensions. An example is that the U.S. Social Security pension plan . The federal adds to the debt whenever it spends quite it receives in tax income . Each year's deficit gets added to the debt. Each budget surplus gets subtracted.

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