Fiscal Policy, math homework help

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Mathematics

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"Fiscal Policy" Please respond to the following:

  • Which fiscal policy measure is more likely to have a greater impact on the economy when unemployment is rising and consumer confidence is falling - an increase in government spending or an equal decrease in taxes? Explain your reasoning.

Optional: Assuming, in a simple economy with no net exports, the marginal propensity to consume (MPC) is 0.8. This would generate a government spending multiplier of 5.0 and a tax multiplier of -4.0 . If government spending increased by $100 million, what would the impact be on total spending in the economy? If instead, taxes were reduced by the same amount, $100 million, what would the impact be on total spending in the economy? Could the government run a balanced budget (increasing government spending and taxes by the same amount) and still grow the economy?

[Note: Government Spending Multiplier is 1/(1-MPC) and Tax Spending Multiplier is - MPC /(1-MPC) . The tax spending multiplier is negative because an increase in taxes would cause spending to fall while a decrease in taxes would cause spending to rise. ]

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Running head; FISCAL POLICY

Fiscal policy
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FISCAL POLICY

Fiscal policy
Fiscal policy refers to actions by the government to spend money or collect money in the form of
taxes with the aim of influencing economic activities. A rise in government spending or equal
decrease in taxes is likely to impact the economy more because of the following comparisons.
Unemployment rise and consumer confidence
During unemployment, most people have little or no income. Due to lack of income, they spend
less. They consume only the ba...


Anonymous
Excellent resource! Really helped me get the gist of things.

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