Suppose the government pursues expansionary fiscal policy by lowering taxes. What are the expected demand-side effects? What are the possible offsets to the demand-side effect? How might supply-side effects change these results?
What will be an ideal response?
Aggregate demand increases as consumption spending increases after the increase in disposable income. Crowding out and the effect of the Ricardian equivalence theorem can offset this if the government must borrow more and interest rates increase and if people anticipate higher future taxes they may increase saving. The supply-side effect may be to generate more productivity as people have a greater incentive to work with the lower tax rates. Tax revenues may not decrease. If the government does not have to borrow more, interest rates don't change, and there is no crowding out.
You might also like to view...
If Stock A sometimes increases and sometimes decreases in value when Stock B decreases in value at the same time, they are
A) negatively correlated. B) uncorrelated. C) positively correlated. D) random bets.
The M2 definition of the money supply is based on the concept that
a. M1 is a small number, and should be increased in size. b. many types of deposits can be used as both payments and stores of value. c. checking deposits are used for payments, and therefore, not part of M1. d. cash is not used for the majority of payments.