Which of the following fiscal policy changes would have a larger overall negative impact on AD and RGDP? Explain your answer in a paragraph or two with credible logics and analysis.
A) A program of tax hike, distributed uniformly across the households earning over $300K annually filing tax returns, amounting to $85 billion in total tax hikes.
Answer: This would have an overall large negative impact on AD and RGDP. Based on the noted posted in the multiplier effects and the calculations it shows that due to the large numbers it would make a bigger impact.
B) An $85 billion sequester (called automatic federal government spending cut) that went into effect on March 1, 2013. This was an across-the-board spending cut in federal government’s various existing programs and services, including maintenance of major infrastructures and aviation traffic control systems.
Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy, or else it involves the government changing the levels of taxation and government spending in order to influence aggregate demand and the level of economic activity.
First fiscal policy change would have a bigger negative impact on AD and RGDP. Based on the multiplier effects it shows that due to the large numbers it would make a bigger impact, because a large tax increase will cause a significant decrease in aggregate demand, which will cause the decrease of real GDP, so the negative effect will be great enough.