Question

Please read the following four examples below. Please identify what they are (i.e., discretionary fiscal policy, monetary policy, or automatic stabilizer) and explain why.  

a) A terrible recession occurs as a result of a bubble in the housing market bursting, and government-funded unemployment compensation is paid out to laid-off workers.

b) As the economy heats up, the resulting increase in equilibrium GDP results in higher income tax payments, which dampen consumption spending somewhat.

c) To stem an overheated economy, the president, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on some government programs to help reduce government spending (G), and thus help reduce inflation.

d) The Federal Reserve decides to increase the money supply in order to help lower interest rates and stave off a more severe recession.

Answer 1

a)to correct the housing market bubble burst government gives unemployment compensation to combat the recession and increase effective demand in the market. its a expansionary fiscal policy

b)As the economy heats up, the resulting increase in equilibrium GDP results in higher income tax payments, which dampen consumption spending somewhat. its a automatic stabilizer as government is playing no role here.

c)To stem an overheated economy, the president, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on some government programs to help reduce government spending (G), and thus help reduce inflation. this is a case of discretionary fiscal policy because government here is cutting its spending to reduce inflation.

d)The Federal Reserve decides to increase the money supply in order to help lower interest rates and stave off a more severe recession. its monetary policy implication because increasing or decreasing the supply of money in the economy comes under the monetary policy section.