1) One cornerstone of President George W. Bush's economic policy during his first term in office was tax cuts targeted towards high income and high net worth households. Under his proposals the marginal tax rate applied to capital gains taxes has been reduced, taxes on stock dividend have been eliminated and marginal tax rates on wage and interest income, particularly those applied to high income brackets have also been reduced. Needless to say, the same tax cut package has been extended by Obama administration for 2 more years started in 2011(was supposed to expire in Dec 2012). However, President Obama proposed in July 2012 to extend the same taxcut package again for 2013, except not for income level over $250K/year. The eventual compromise was to keep the tax cut up to $300K per household that strated from Jan, 2013 for 2 more years. a) What would be the short-run effects of tax cuts on interest rates and growth in RGDP given that the economy was in recession at the time of extension of Bush’s tax cuts by Obama Administration? Contrast the Keynesian and crowding out perspectives on this question. b) If in question (a) we were interested in the long run effects of the proposed tax cuts would a "supply side" economist give a different answer to this question than an economist who believed that federal budget deficits created significant "crowding out" effects? Does the same logic apply to the the Fiscal Stimulus package of 2009 and 2010 rolled out by President Obama Administration? Explain. 2) "Market Slump Helps Sell Tax Cuts Now." (Headline from fall 2000) Explain from the standpoint of Keynesian macroeconomic theory why the slump in the stock market that began in the spring of 2000 help build support for Bush's tax cut proposal in his first year in office. How was it different from the fiscal expansion of Obama Administration started in 2009? 3) The exchange rate of the $ has increased by 20% or more against the currencies of major US trading partners during the past year. Do you think the Fed welcomes continued strengths in the exchange value of the $ at this time? Explain your answer carefully. 4) What is the “crowding out” effect of budget deficits? What determines whether crowding out leads to a minor or major reduction in the impact of expansionary fiscal policies on Aggregate Demand? How is it related to the massive fiscal deficit forecast under Obama Administration? 5) Why do think the European Union countries decide to have a single central bank and a single currency, instead of just agreeing to maintain fixed exchange rates among their currencies? 6a) What fiscal policies are recommended by conservative “supply-side” economists? Are they same as the current arguments of the GOP law makers against the fiscal budget of Obama Administration? 6b) What assumptions about the behavior of savers and investors are required for conservative supply side theories of the benefits of tax cuts to be correct? 6c) Why did the experience of the 1980's following the massive Reagan tax cuts discredit supply side theory in the eyes of many economists? 7) How can current large government deficits under Obama Administration lead to large trade deficits?