# Fiscal Policy Tools: Answers to Review Questions

1. In the tax cut example on pages 236-37 (see the attached file),

( a ) By how much does consumer saving increase initially?

( b ) How large is the initial spending injection?

2. Suppose the consumption function is

C = $400 billion + 0.8Y

and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially (before multiplier effects) with

( a ) A $50 billion increase in government purchases?

( b ) A $50 billion tax cut?

( c ) A $50 billion increase in income transfers?

What will the cumulative AD shift be for

( d ) The increased G?

( e ) The tax cut?

( f ) The increased transfers?

3. Suppose the government decides to increase taxes by $20 billion and to increase Social Security benefits by the same amount. How will this combined tax transfer policy affect aggregate demand at current prices?

5. If the AD shortfall is $600 billion and the MPC is 0.9,

( a ) How large is the desired fiscal stimulus?

( b ) How large an income tax cut is needed?

( c ) Alternatively, how much more government spending would achieve the target?

6. If the AD excess is $300 billion and the MPC is 0.8,

( a ) How much fiscal restraint is desired?

( b ) By how much do income taxes have to be increased to get that restraint?

7. ( a ) According to the News on page 238, how much more did the average household spend on appliances, electronics, and furniture when it received the 2008 tax rebate?

( b ) If all 110 million households did so, how much did aggregate consumption increase?

( c ) If the MPC was 0.75, how much would cumulative spending increase as a result?

https://brainmass.com/economics/personal-finance-savings/fiscal-policy-tools-answers-to-review-questions-508492

#### Solution Preview

1.

a) Saving increases by MPS x the tax cut

b) The initial spending injection is MPC x the tax cut

2.

a) AD will initially increase by $50 billion

b) AD will initially increase by ...

#### Solution Summary

This solution gives the answers to common Macroeconomics questions involving fiscal policy. The topics covered include:

- fiscal stimulus

- tax cuts

- Social Security

- the 2008 tax rebate