Define the following terms and explain their significance to the study of macroeconomics.
a. Fiscal policy
b. Transfer payments
c. Effect of income taxes on the multiplier
d. Supply-side tax cuts
What will be an ideal response?
a. Fiscal policy is the federal government’s plan for tax revenues, spending, and transfer payments. It is designed to change aggregate demand in a desired direction. Fiscal policy is a tool that government has to affect the economy.b. Transfer payments are payments made by governments to individuals that is not payment for work done or goods and services supplied. Economists consider transfer payments to be negative taxes. An increase in transfer payments is equivalent to a decrease in taxes.c. When income taxes are added to the income-expenditure model, the numerical value of the multiplier is reduced. The consumption line will become flatter since some of the increases in income will flow to the government, and therefore, reduce disposable income available for spending.d. Supply-side tax cuts are based on the premise that certain tax cuts will increase the aggregate supply curve. Tax cuts on saving, capital gains, and personal income expected to increase incentives to save, accumulate capital, and work are supposed to shift the aggregate supply curve outward.
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What will be an ideal response?