Author Question: Suppose fiscal policy makers pass a budget that cuts taxes in the current period and are expected to ... (Read 127 times)

luvbio

  • Hero Member
  • *****
  • Posts: 623
Suppose fiscal policy makers pass a budget that cuts taxes in the current period and are expected to cut taxes in the future. Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.
 
  What will be an ideal response?

Question 2

When the unemployment rate is low, we would expect that
 
  A) the probability of losing a job is high.
  B) the probability of losing a job is low.
  C) the probability an unemployed individual will find another job is low.
  D) the separation rate will increase.



adf223

  • Sr. Member
  • ****
  • Posts: 304
Answer to Question 1

The cut in current T will cause disposable income to rise and current C to rise. This will cause the IS curve to shift right. The reduction in future expected taxes will, all else fixed, increase human wealth and current consumption. This will also cause the IS curve to shift right. As future T is cut, future Y will rise. This will increase both current C and I and, again, IS shifts to the right. The increase in future interest rates will have the opposite effect on C and I causing the IS curve to shift left. In theory, the effects on current output are ambiguous. The higher expected future interest rates have a negative effect on current demand. All other factors have the opposite effect.

Answer to Question 2

B



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

There are more sensory neurons in the tongue than in any other part of the body.

Did you know?

You should not take more than 1,000 mg of vitamin E per day. Doses above this amount increase the risk of bleeding problems that can lead to a stroke.

Did you know?

In inpatient settings, adverse drug events account for an estimated one in three of all hospital adverse events. They affect approximately 2 million hospital stays every year, and prolong hospital stays by between one and five days.

Did you know?

Drying your hands with a paper towel will reduce the bacterial count on your hands by 45–60%.

Did you know?

About 3% of all pregnant women will give birth to twins, which is an increase in rate of nearly 60% since the early 1980s.

For a complete list of videos, visit our video library