Fiscal Policy and Taxes

Fiscal policy refers to

• a policy action by Congress to overrule unpopular budget cuts by the president.

• the purchase and sale of U.S. government securities to regulate the money supply.

• the use of government spending and taxation to influence the level of economic growth and inflation.

• the adjustment of the GDP for inflation.

Income taxes affect aggregate demand

• indirectly by changing investment spending.

• indirectly by changing consumption.

• directly through government spending.

• 1. indirectly by changing net exports.

Fiscal policy affects which two components of aggregate demand either directly or indirectly?

• Consumption and investment

• Net exports and saving

• Taxes and consumption

• Government spending and consumption

Economists define two components of fiscal policy. These are:

• Discretionary fiscal policy and automatic stabilizers.

• Obligatory fiscal policy and automatic fiscal actions.

• Automatic stabilizers and reflexive fiscal policy.

• Discretionary fiscal policy and reflexive fiscal policy.

An automatic stabilizer is

• a change in government spending aimed at achieving a policy goal.

• a deliberate change in taxation aimed at increasing real GDP.

• an element of fiscal policy that automatically changes in value as real GDP changes.

• a decrease in tax rates as the economy moves into a recession.

Discretionary fiscal policy is best defined as

• the deliberate change in tax laws and government spending to change equilibrium income.

• the deliberate manipulation of the money supply to expand the economy.

• the policy action taken by Congress to reduce the federal budget deficit.

• 1. the automatic change in certain fiscal instruments when real GDP changes.

An appropriate fiscal policy for a severe recession is:

• a decrease in government spending.

• a decrease in tax rates.

• appreciation of the dollar.

• an increase in interest rates.

Assume that aggregate demand in the economy is excessive, causing demand-pull inflation. Which of the following would be most in accord with appropriate government fiscal policy?

• an increase in soil conservation subsidies to farmers

• passage of legislation providing for the construction of 8,000 new post office buildings

• an increase in the size of income tax exemptions for each dependent

• an increase in Federal income tax rates

Identify the fiscal policy actions you would recommend.

• increase government outlays

• decrease government outlays

• increase income taxes

• decrease income taxes

Identify the fiscal policy actions you would recommend?

• decrease income taxes

• decrease government spending

• increase government spending

• increase income taxes