Econ -Unit 3- Chap 12 Questions

1. What is the central thrust of the Employment Act of 1946? What is the role of Council of Economic Advisers in response to this law?

Commits the Federal government to use all practicable means, consistent with the market system, it commits the Federal government to take action through momentary and fiscal policy to maintain economic stability. The council assisted and advised the president on economic matters.

2. Assume that a hypothetical economy with a MPC of .8 is experiencing a severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplish the same goal.

Government spending would have to increase by $6.25 billion. A tax cut would need to be $7.81 for the same effect. There's a difference because with a tax cut there will be an increase in saving, so you have to cut it by more than your aim. A possible combination to reach the same goal would be a tax cut of $7 billion and an increase in government spending by $.65.

3. What are government's fiscal policy options for ending severe demand-pull inflation? Use the aggregate demand-aggregate supply model to show the impact of these fiscal policies on the price level. Which of these fiscal options do you thin might be favored by a person who wants to preserve the size of the government? A person who thinks the public sector is too large?

Options:
Decrease government spending: Preferred by those who want to preserver the size of the government
Increased taxes: Preferred by those who believe the public sector is too large


6. Explain how built-in (or automatic) stabilizers work. What are the differences between proportional, progressive, and regressive tax systems as they relate to an economy's built-in stability?

A built-in stabilizer is anything that increases the government’s budget deficit during a recession and increases its budget surplus during inflation without requiring explicit action by policy makers. Which means that to some degree, government tax revenues change automatically over the course of the business cycle and in ways that stabilize the economy.

9. Some politicians have suggested that the US enact a constitutional amendment requiring that the Federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact the contractionary fiscal policy whenever the economy experienced a severe recession.

If we went into a recession, they'd have to try to stop it with contrfactionary fiscal policy to keep the budget around what it was