Introduction to Macroeconomics Econ 104a,c,d - Spring 2012 Michael Favorito
Worksheet 5 – Fiscal Policy, Money and the Federal Reserve Bank
Due Thursday March 8 on moodle
1. In fiscal policy, what are automatic stabilizers? Give two examples.
- Expenditures that automatically increase or taxes that automatically decrease when economic
conditions worsen. Examples: income taxes, unemployment benefits, food stamps.
2. What is discretionary fiscal policy? Give two examples of recent discretionary policies that
have been implemented during the current economic crisis of the last three years.
- Deliberate policy action by the government.
Examples: tax cuts and increases, spending increases and decreases. Happens by acts of
congress, lag time is significant. American Recovery and Reinvestment Act of 2009, The
“Obama Stimulus Package” of 2009.
3. Taxes play a large role in fiscal policy. How do economist’s differentiate/analyze the different
types of taxes? (Hint: three of them, progressive….)
-Proportional (Flat) Tax: All people pay the same percentage of their income, example: Income
tax in Massachusetts.
- Progressive Tax: Higher income people pay a higher percentage of their income than lower
income people, example: Federal income taxes
- Regressive Tax: higher income people pay a lower percent of their income than lower income
people. Example: state/city sales tax
4. In our simple models, the multipliers are the same for all spending and all taxes. How do real
world multipliers differ? How do they impact fiscal policy?
-Government Spending: purchases of goods and services by the government. Has the basic
multiplier: Y=(1/1-mpc)*G. Examples: stimulus package of 2009 are spending on roads,
highways, infrastructures, and transfers to the state.
-Taxes: decreases or increases disposable personal income. Tax Multiplier: Y=(1/1-mcp)*Tx.
Examples: stimulus package are decreased income taxes on the working poor, increasing
deductions for people with children, and decreases in overall income taxes.
-Transfer Payment: increase of disposable personal income. Multiplier is same as tax
multiplier. Examples: extended benefits for unemployment insurance.
5. What are the general characteristics of Money? (3)
- Medium of exchange, store of value, unit of account, standard of deferred payment. 6. What makes up the demand for Money? (3)
- Transaction Demand: the amount of money balances indicates desire for purchasing. The only
demand recognized by Classical Economists.
- Precautionary Demand: money to hold to meet unforeseen expenses.
- Speculative Demand: arises from people’s des