−Think of the 91% marginal tax rate §The Laffer Curve−Income tax revenue = tax rate X income −The Laffer Curve is an illustration of the relationship between taxes and tax revenue −Basically, it shows the happy medium between low taxes and lots of money and high taxes and lower incentive to earn more. Questions from Inquizitive 1.What is the definition of supply-side fiscal policy? -Fiscal policy aimed at impacting long-run aggregate supply rather than aggregate demand 2.Fill in the blanks to complete the passage about monetary policy and fiscal policy. -The federal government -Money supply -Taxes -Budget 3.Place in chronological order the lag phenomena associated with the use of fiscal policy to smooth business cycles. -Recognition Lag -Implementation Lag -Impact Lac 4.Fiscal policy is usually intended to influence aggregate demand (AD) rather than short- or long-run aggregate supply (SRAS and LRAS, respectively). -True 5.Place the events in chronological order. -Start of Great Recession -Economic Stimulus Act of 2008 -National Elections -American Recovery and Reinvestment Act of 2009 - End of Great Recession 6. Classify each scenario according to the type of policy lag it illustrates. - Recognition Lag: Economists determined…, The economy trends downward for two months… - Impact Lag: Congress passes and immediate tax cut…, Government Spending is cut… - Implementation Lag: Congress approves a $100 million…, A bill proposing a tax cut… 7. Identify each policy action as being focused on the demand side, the supply side, or both.
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3-Demand Side: Stimulus packages for firms that are “too big to fail”, Increasing spending on “shovel-ready” projects -Supply Side: Government-funded scholarships for college students, Research grants for a corporation developing new technologies -Both: Lowering income tax rates at all income levels 8.Fill in the blanks to complete the passage about the Laffer curve. -Tax revenue -Tax rate -Less -More -Top marginal 9.Suppose the government has a balanced budget and wants to increase spending without changing tax rates. The government enters the loanable funds market to borrow $150 billon for economic stimulus spending. How much money is available… -250 10.If the marginal propensity to consume is 0.80, what is the total implied increase in economic spending activity from a government stimulus of $100 billion? -500 billion 11.Which policy tools are considered automatic stabilizers?
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