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Lecture 8

ECON 203 Lecture Notes - Lecture 8: Regressive Tax, Progressive Tax, OldiesPremium

2 pages76 viewsFall 2016

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ECON 203

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Chapter 9
1. What is the appropriate fiscal policy to employ during a recessionary gap, and why (for any of
these to work, we need to know what level of RGDP is, what the desired level of RGDP is, and
the MPC)- expansionary, so we want to increase government spending or cut taxes to increase
aggregate demand- RGDP increases because government spending increases
a. Fiscal policy during inflationary gap- cut government spending or increase taxes to
decrease aggregate demand- politically unpopular- need to target the private sector
because they do a better job of handling money (increase taxes)
b. Why is use of fiscal policy complicated with stagflation- if you treat it like a recessionary
gap to tackle unemployment, you get higher inflation; if you treat it like an inflationary
gap to tackle inflation, you get higher unemployment- TRADEOFF BETWEEN
2. 2 examples of automatic stabilizers- how do they keep aggregate near full employment
a. Automatic stabilizer- helps economy get back to normal without specific government
i. Unemployment insurance, welfare, personal income tax- (Recession) increase in
transfer payments and decrease in taxes (Inflation) decrease in transfer payments
and increase in income taxes because more people are working; it makes sure the
AD doesn’t increase or decrease too much
3. If gov hires people to count grass, what would happen to GDP? Is wealth created- why or why
not?- GDP would increase because government spending is being stimulated, which increases
RGDP, and aggregate demand. Wealth is created because those dudes get money for counting
grass, and so based on their MPC (ex. Spending 80% of the $100 they get) the money goes back
into the economy, going to other people, which increases AD. The amount it is expected to
increase is the spending multiplier = 1 / 1- MPC
4. How does mandatory spending differ from discretionary- give examples of both
a. Discretionary spending- spending that has to go through Congress and be passed
i. Court system, infrastructure, education, agriculture, national parks
ii. Farm subsidies- 74% of corn farmer subsidies go to the 10% richest corn farmers
b. Mandatory spending- spending that doesn’t have to be voted on, it just happens
i. Entitlements- automatic spending; social security, medicare
5. What has happened to government spending as a percentage of GDP over time- why it has
been increasing massively because of mandatory spending (70% of government spending!!?) we
are basically just having a government that does income redistribution
6. What type of pension system is social security- what problems does it face, and what are reforms-
the elderly receive more entitlement spending than the poor because even wealthy oldies can
collect it ($807 billion); more and more people are living longer- current workers and baby
boomers fund their retirement together- but baby boomer $ in the Social Secuirty trust fund,
which the government conveniently borrowed from social security is a pay as you go pension
a. Money will have to come from other government revenues than the payroll tax (decrease
discretionary spending)
b. Raise payroll tax revenues by increasing payroll tax rates or increasing the maximum
earnings limit for Social Security (medicare has no limit)- puts a HUGE tax burden on
the wealthy
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