1.Since 1960, government spending of purchases, transfers and net interest has grown or shrunk as a...

1.Since 1960, government spending of purchases, transfers and net interest has grown or shrunk as a portion of USA GDP?

a.As an economy is stuck in recession government purchases rise, fall or remain unchanged?

b.As an economy is stuck in recession government transfers rise, fall or remain unchanged?

2.As an economy is stuck in recession government net interest payments ON PAST DEBTS rise, fall or remain unchanged?

a.Name a government automatic stabilizer program.

b.How does your government program automatically counteract the economy?

3.Of the three lags, which one hurts fiscal policy the most?

Solutions

Expert Solution

a) As an economy is in recession, unemployment rises and output falls. Therefore consumer spending falls. Hence the government has to pump money into the economy to give compensation to public. Hence, government spending or government purchases rise during recession.

b) Since during recession, taxes fall as unemployment rises and output falls, the government has to give out more to the people in the form of transfers such as welfare payments. Hence government transfers rise during recession.

2. As the economy is into recession, the government's net interest payments on past debts will rise. As the debt rises, government soon has to spend more on interest.

a. The best known automatic stabilizer program is personal and corporate taxes and transfers like welfare and insurance.

b. An automatic stabilizer program is framed or designed in a manner which counters the current economic trend, such as recession. For example, progressive taxes could come into play. A person with higher income may be subject to higher taxes while his income is high. If his income lowers he automatically falls to the lower tier of taxation structure.

3. Of the three lags, the legislative lag can hurt fiscal policy the most. This is because even after the decision of the policy is taken , the legislature may take time to put the policy into action. More often than not, the government has to wait for a new party settlement, as legislators might debate regarding the implementation and enforcement of policy.

Rahul Sunny answered 1 year ago

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