Question

This is for my macro class!

Questions: #1 Identify each of the following as expansionary or contractionary fiscal policy (or neither) and show their effect on the ADAS model. a. The corporate income tax rate is increased b. Defense spending is increased C. The Federal Reserve lowers the target for the federal funds rate d. Families are allowed to deduct all their expenses for day care from their federal income taxes e. The individual income tax rate is decreased

Answer 1

Ans) Fiscal policy is a tool that government uses to influence the national economy by adjusting the spending level or taxes or both.

Contractionary fiscal policy is when government increases tax or reduces spending or both.

Expansionary fiscal policy is when government decreases tax or increases spending or both.

1) Increasing corporate tax is a contractionary fiscal policy. Due to which investment decrease and hence aggregate demand will decrease.

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2) Defence spending is a part of government expenditure. When government spending increases, it is known as expansionary fiscal policy. With increase in government expenditure, aggregate demand increases.

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3) Federal reserve o.e central bank of USA implements monetary policy and not fiscal policy.

4) This deduction is a type of tax deduction. So, it is part of expansionary fiscal policy. With deduction in tax, disposable income of people increases, which in turn increases the aggregate demand.

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5) Due to decrease in income tax, aggregate demand increases and it is expansionary fiscal policy.

Y Y Y