Policymakers who want to stabilize the economy must decide how much to change th
ID: 1118229 • Letter: P
Question
Policymakers who want to stabilize the economy must decide how much to change the money supply, government spending, or taxes. True or False: One of the reasons why it is difficult for policymakers to choose the appropriate strength of their actions is that the impact of a change in policy on aggregate demand is often too fast. O True O False The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories If investors believed that capital taxes would remain low, the government's action would result in a capital stock. larger/smaller After investors have responded to the announced tax reduction, the government can get more tax revenue by capital investments. taxes on income from increasing/decreasing True or False: Given your answer to the previous part, investors would not believe the government's announcement. O True O FalseExplanation / Answer
1.False.The impact of change in policy is slow.It takes time for the information to circulate in the market and the demand shift takes place slowly and slowly.
2.The government announcement will result in larger capital stock.This is because the amount of income after taxes could be saved and used for further investment.
3.The governemnt can get more tax revenue by increasing the tax rate on income from investment.This is because the investment demand in the economy will be increased,due to which the income of the people will increase and hence the government can charge more tax on investment income.
4.False.They have to believe the announcement of the government.This announcement is going to expand the investment level and the income of the investors in the long run.