Which policy measure would be more successful in stimulating the economy: a $100 billion tax cut...

Which policy measure would be more successful in stimulating the economy: a $100 billion tax cut financed by a $100 billion cut in government purchases, or a temporary tax credit of 10% on each productive investment undertaken next year? Explain your answer.

Solutions

Expert Solution

A temporary tax credit of 10%, on each productive investment, will be more successful, because it will increase the consumption and output and make positive impact upon the economy. But, in another alternative, decrease in consumption and output due to $100 billion cut in government purchases, will be more than the increase in consumption and subsequent output due to $100 billion tax cut.

Decrease in consumption due to decrease in expenditure = 100*(1/(1-MPC))

Increase in consumption due to decrease in tax = 100*MPC*(1/(1-MPC))

So, net increase in consumption = 100*MPC*(1/(1-MPC)) - 100*(1/(1-MPC))

So, net increase in consumption = (MPC - 1)*(100*(1/(1-MPC))

Here in general, MPC < 1

Then,

(MPC-1) will be negative.

Hence,

(MPC - 1)*(100*(1/(1-MPC)) will be negative.

but, 10% tax credit, will always give positive impact upon the output and consumption. So, this alternative is selected.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Is the FED’s present policy focused more on stimulating the economy or on reducing inflation? Or...

Is the FED’s present policy focused more on stimulating the economy or on reducing inflation? Or is the present policy evenly balanced? What do you think about the FED’s policy?

Which of the following policy changes would decrease the real interest rate? A A tax cut...

Which of the following policy changes would decrease the real interest rate? A A tax cut on interest income B A policy that decreases government consumption expenditures C A reduction in social security benefits D All of the above correct answer is D need the explianation

Keynes and early Keynesians maintained that monetary policy would be ineffective in stimulating the economy, especially...

Keynes and early Keynesians maintained that monetary policy would be ineffective in stimulating the economy, especially when the economy is in a deep stagnation such as the Great Depression. The U.S. economy is highly likely to slip into a deep recession because of the coronavirus crisis. Discuss the effectiveness of the Fed’s decision to inject a massive amount of money into the economy to avert any possible recession.

Suppose the economy is initially in equilibrium. Congress passes a tax cut policy. Compare the impact...

Suppose the economy is initially in equilibrium. Congress passes a tax cut policy. Compare the impact of this policy in a small open economy and a large open economy. In a small open economy, how does this policy affect national saving, the real interest rate, trade balance, and the real exchange rate? Use diagrams to help answer this question. In a large open economy, how does this policy affect national saving, the real interest rate, trade balance, and the real...

1. A tax cut to the tax rates may not stimulate the economy if: a)It is...

1. A tax cut to the tax rates may not stimulate the economy if: a)It is permanent and increases permanent disposable income b) decisions for consumption are based only on current income instead of permanent income c) it is distributed evenly in the population of the economy d) it is temporary and thus doesn't change the permanent disposable income e) It is too big 2. An economy that is headed into recession decides to start an expansionary fiscal policy. 6...

Which of the following would not be considered pure contractionary fiscal policy? A. A cut in...

Which of the following would not be considered pure contractionary fiscal policy? A. A cut in taxes matched by an equal cut in spending. B. A cut in spending used to finance a cut in the money supply. C. A cut in spending in order to buy back some outstanding government bonds. D. A tax increase used to buy back some outstanding government bonds.

if you could order a cut of $700 billion in federal spending, which programs would you...

if you could order a cut of $700 billion in federal spending, which programs would you cut and why would you cut them? Be specific about the programs, the dollar amounts, and your reasoning.

1,2,3,4,5,6,7,8,9,10 1.Explain the effect of a discretionary cut in taxes of $40 billion on the economy...

1,2,3,4,5,6,7,8,9,10 1.Explain the effect of a discretionary cut in taxes of $40 billion on the economy when the economy’s marginal propensity to consume is .75. How does this discretionary fiscal policy differ from a discretionary increase in government spending of $40 billion? 2.Explain what is meant by a built-in stabilizer and give two examples. 3.Differentiate between discretionary fiscal policy and nondiscretionary or built-in stabilization policy. 4.What does the “standardized budget” measure and of what significance is this concept? 6.What are...

If the Government cut income taxes by 100 billion and the marginal propensity to consume (MPC) is...

If the Government cut income taxes by 100 billion and the marginal propensity to consume (MPC) is equal to .75? How would this tax cut impact the National Budget and the National Debt? What are the pros and cons of running a deficit? Would you support such a tax cut and for whom should we impose the tax cut?

Suppose the government decides for tax cut next year by an amount equal to $2 billion...

Suppose the government decides for tax cut next year by an amount equal to $2 billion a year. Along strictly monetary theory lines, using as your framework the equation of exchange, analyze the effect on money income, prices, and interest rates under three alternative sets of circumstances: 1. The cut in taxes is accompanied by an equal increase in the deficit, which is fully financed by increasing the money stock at a rate of $2 billion a year more than...

Subjects