The Tools of Fiscal policy

EXERCISE 42
The Tools of Fiscal policy
Changes in lederaltaxes
and federal governm6nl
spending designed to atlect
the levet ol aggregat€ de.
in som€
:r^11!""0are called cases aggregar€ suppty) in thB
€conomy
liscal policy Aggregate demand
is
the lotal amount ol spenOing
on go-oOs and services in
rDe economy during a
stated period ol trme. Aggre_
9ale.demand consisls ol consumer spendtng,
government spending, and inveslmenl
sp€nding. aggregate
supply consisls ol the tofal
amount ol goods and serv,
tc,es available in lhe
economy during a stated period
ol time
r.,".":sion, aggregate domand is usua y
,^^ ,?:':ln
Ioo
low lo bring about lult employmenl
ol resources.
t
overnmenl can increase aggregate
demand by
soond.ng more, cutting ta^es,
or dorng ooth. These
aclions ohen result in budgel
deJiclts becaus: -:
QO(ernmenl spends mor6 than il
collecrs in tar.. __
cJBasinq goJernm€nl sOenOtng
w,tfroul rnc,e-. .taves or decreasing t es wrthout
decfe"r,ng .-:.. .menl oxpendilures should increase
aggregal: ::_
mand. Such an €xpansionary fiscal policy
c.6ase employment, inllation,
or bolh.
lf !he le Jet ot aggregale oemald
rs too
ernment c€n reduce rts sp6noing,
shor:
-_
hjer r:
increase lir_:. ,.
do botn. 1"95" actrons should resuJl
rn a tj.:!
budgel surplus or a sma,.er Urog"t
ouii",r ,na: ,..
rsted belore. Such a contraclionary
fiscaj !::
shoulo roy/er lh€ leve ot agg.egate
0".""0.
ecolom/ \4 I e/Oer pnce less enp
"]j
oyn.p. 6,
:,
.
sources, less inllalton. or bolh
Part I
Directions: Decide whether each
or the rorowing fiscar poricies o1 the
federar governmenl is ex::contraclionary. Write oxpansiora
or contrcctiona0l and exptain the reasons
",
ry
1T:l
for \, -
l
The government cuts business
and personar income laxes and increases
its own spending.
2.
The government incr€ases
the personal income ta}, sociai s()currty
tai(' and corporale incorne
Government spending stays
the
3.
same.
Government spending goes
up while taxes remain lhe same
The government reduces the
wages of ils employees while rarsrng
taxes on consumers and
ness. Other government spending
remains th6 same.
i,:
Ftonn-Mastor Cufticulurn
Guida in Ecr)rlomqs.. I€acimg Shateg/€s
/o/ H,qi Scro. Ecanomrcs
on Economic Educalron. rses1, pp.
cou.sas (N€w york: Joinl Co-.---r
rsr--tsz.
'1
CoPyrighr o 198€ Joinr
Couoc,t on fconom,c
Educ.rron_ l3 I
x'p'oducrio' it prohibir'd eirhour
w'(r'n pcrmision f.om Thr Join! councir
on Econom,c Educ6tio^
__
@rp
Part II
lnstructions: Test your underst,
::"* 1,, ,",;;;;,";;;";:"i:,!!l,rEjiJ:,"k11ff,[:li:'fi':[::lj:i,"::." jff: ::
tn".p"".. ,.
expansionary or contractionary
fiscal policy. fiff in
O, Objective lot Aggtegate
?.?,:^n
wflle "increase" il you wrsh .
to
.[
write "oecrease,,
toffo*.,
Demand
;,';ffi ::::::f :il::::1"t:H::,
Column B: Action on Iaxes
','increase" il you
wishto,ncrease taxes.
rtute oecrease,, il yOu WiSh
lO decrsase laxes.
Writ_e
Column C: Action on Governmont
Spending
Wrile "increase" il you
wish to i
government spendino
write "docrease",i;'*ij;';'""rease
decrease government spend nq.
corumn D: Erect on Budoer
Write "toward deficit,'if
write "toward surprus"
1
. The narionat
2. tnftatron
iou wish.to incroase the deficit (or reduce
the surplus).
in-"-rl".u t .rrprr.1.
"
ir you wrsh to roduce trre
oeticii lor
rnr*ptoyr*Ilf,ffiI-d
rs s1r0ng and irr
rar,
rs
*" uzl"l*
il;g.ffi,,,
3.^surucys sno* corsume,s
th,
sa es are weak, ano b"usrness
invenrories
ll"ol^ril:-l!1u,,
are tncreasin0
rap dly.
satruno,n",*i [Iplrd-E-i
1-,r::,-...s
an0
economrsls be reve a
slror0 in,latr;n ttes ahead.
5. lnftation persisls white
,;;pby*;G,y,
i
t igh
132
R.p,oduction
i' prohibi,.o
on Economrc Edecs.ea.
**.* *nn.. ,.*,"Llr^€Lo-'X:
i,,,s,on rrom th. *:nr
Joln( louncir
Cou.Efl on Eco*_i. _,_.--

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