Question

An executive order called for a payroll tax deferment. This allows employees to not pay their portion of payroll taxes until Federal taxes are due on April 30. Describe the condition(s) are (is) necessary for this executive order to stimulate the economy? B. Draw the market graph assuming the condition(s) above and describe the equilibrium changes. C.   Do you think this is an effective policy? Why or why not?

Answer 1

• This problem is related to economics , hence solving it accordingly will give us a better perspective.
• when the demand in markets is low , FED has various tools at its disposal to increase the spending and bringning back the demand in the market
• one of the tools used is tax deferment or tax relaxations, these both work in almost the same way i.e. increasing liquidity in the market. the process will be as follows
  • A person paying 10 as a tax on every 100 earned will have an additional 10 today, if the FED decides to defer the tax payment.
  • hence the avg income in that month will go up by 10, in this way the additional income inreturn will be spent by the people in the markets , bringing in the liquidity.
  • when there is additional boost to demand which leads to income in other hands because one mans expense is other mans income
  • in this way by defering the tax govt creates demand and when demand changes , keeping the supply constant ,equilibrium will be affected .
• Fed has many tools to create this type of liquidity in the market , sometimes its spends out of its pockets and sometimes it defers payment of taxes thereby creating additional money /income available for spending.
• this method does help till some extent as this will only be effective for people who are salaried and not whole population , additionally the FED has to take more effective measures along with deferment as this demands are temporary in nature,
• i have addressed all the answers in a point wise format , presentation should be according to requirement
• the graph asked will be nothing but demand curve shifting right hence changing the equilibrium