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Determining the Effects of Discretionary Fiscal Policies

Part I
Determine whether each of the following is an example of a discretionary fiscal policy action. Give reasons to support your answer.
a. A recession occurs, and government-funded unemployment compensation is paid out to laid-off workers.
b. Congress votes to fund a new jobs program designed to put unemployed workers to work.
c. The Federal Reserve decides to reduce the quantity of money in circulation in an effort to slow down inflation.
d. Under powers authorized by an act of Congress, the president decides to authorize an emergency release of funds for spending programs intended to head off economic crises.

Part II
Now, determine whether each of the following is an example of an automatic fiscal stabilizer. Give reasons to support your answer.
a. A government agency arranges to make loans to businesses automatically when an economic downturn begins.
b. As the economy heats up, the resulting increase in equilibrium real GDP immediately results in higher income tax payments, which dampens consumption spending somewhat.
c. As the economy starts to recover from a recession and more people go back to work, government-funded unemployment compensation payments begin to decline.
d. To stem overhead economy, the president, by using special powers granted by Congress, authorizes emergency impoundment of funds. These funds were previously authorized for spending on government programs.

Solution Preview

Discretionary fiscal policies are changes in fiscal policy in response to economic conditions. Automatic stabilizers are expenditures that have stabilizing economic effects, both lowering economic output in times of economic expansion, and dampening the effects of a recession. These include unemployment insurance and progressive taxation.

Part I
a. A recession occurs, and government-funded unemployment compensation is paid out to laid-off workers.
No. This is an automatic result of the recession.
b. Congress votes to fund ...

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