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Answer to Question #50809 in Macroeconomics for Lucy Bonfiglio

Question #50809
6) 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.

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.
Expert's answer
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 will have a negative impact on the aggregate demand, especially concerning the households earning over $300K annually. But the government can compensate this loss by increase of the government spending, as now it has additional $85 billion for it.

B) An $85 billion across-the-board spending cut in federal government’s various existing programs and services, including maintenance of major infrastructures and aviation traffic control systems will have a larger overall negative impact on AD and RGDP, as the decrease in government spending for such purposes will decrease bots consumption and investment, which will have higher negative impact especially in the long-run.

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