Question

1,2,3,4,5,6,7,8,9,10 1.Explain the effect of a discretionary cut in taxes of $40 billion on the economy when the economy’s marginal propensity to consume is .75. How does this discretionary fiscal policy differ from a discretionary increase in government spending of $40 billion?

2.Explain what is meant by a built-in stabilizer and give two examples.

3.Differentiate between discretionary fiscal policy and nondiscretionary or built-in stabilization policy.

4.What does the “standardized budget” measure and of what significance is this concept?

6.What are political business cycles and how could they be created?

7.Explain the crowding-out effect.

8.What are the three functions that a commodity must fulfill to be useful as money?

9.Why can’t food be used as a form of money?

10.Why is money considered to be debt?

Answer 1

Answer:

1.discretionary fiscal policy differ from a discretionary increase in government spending of $40 billion:

If MPC is .75, the multiplier is 4.

A tax cut of $40 billion will result in initial increase in consumption of $30 billion (.75 ´ $40 billion).

This initial increase in spending will ultimately result in an increase in consumption spending of $120 billion because of the multiplier process.

In contrast, an initial increase in government spending of $40 billion will ultimately increase consumer spending by $160 billion (4 ´ $40) because none of the initial increase is siphoned off as savings as would be the case with a $40 billion tax cut.

2.Built-in stabilizer and its examples:

In macroeconomics, automatic stabilizers describes how modern government budget policies, particularly income taxes and welfare spending, act to dampen fluctuations in real GDP.

The size of the government budget deficit tends to increase when a country enters a recession, which tends to keep national income higher by maintaining aggregate demand.

There may also be a multiplier effect.

This effect happens automatically depending on GDP and household income, without any explicit policy action by the government, and acts to reduce the severity of recessions.

For example if unemployment was to rise, government spending on benefits would increase to reduce the impact on those effected and to prevent poverty.

Similarly, the budget deficit tends to decrease during booms, which pulls back on aggregate demand.

Therefore, automatic stabilizers tend to reduce the size of the fluctuations in a country's GDP.

3.Differentiating  between discretionary fiscal policy and nondiscretionary or built-in stabilization policy:

Fiscal policy is the policy related to government taxation and government expenditure.

Discretionary fiscal policy:

It is based on the judgment of policy makers in which a policy objective is identified and relevant measures are taken related to that objective.

for example, imposing a new tax or changing income tax exemptions, raising expenditure etc.

non discretionary or built-in stabilization policy:

In response to the changing economic environment, when the taxes or expenditure automatically, which helps in fighting boom, recession or unemployment etc is called non discretionary or automatic stabilization policy.

For example, progressive income tax and unemployment compensation.

Differences:

The key differences between the two include, timing of implementation.

While automatic stabilizers are implemented without any time lag, discretionary fiscal policy requires government legislation and is a long process.

Also, automatic stabilizers are narrow in fulfilling their objectives like controlling aggregate demand, discretionary policy can target various areas of the economy like unemployment .

Thus, both should work hand in hand to achieve the broader objectives of the economy.