Identify each of the following events as: a) part of an expansionary fiscal poli
ID: 1206050 • Letter: I
Question
Identify each of the following events as:
a) part of an expansionary fiscal policy
b) part of a contractionary fiscal policy
c) part of an expansionary monetary policy
d) part of a contractionary monetary policy
The corporate income tax rate is increased.
Defense spending is increased.
Families are allowed to deduct all daycare expenses from their federal income taxes.
The individual income tax rate is decreased.
The Federal Reserve Bank buys Treasury securities.
Explanation / Answer
The government policy to deliberately influence the aggregate demand in the economy through changes in taxes or government spending or some combination of both is called the discretionary fiscal policy. The fiscal policy that increases aggregate demand by increasing government expenditure or by cutting the taxes or both is called the expansionary fiscal policy. If the policy decreases the aggregate demand by increasing the taxes or decreasing government expenditure, it is called contractionary fiscal policy.
Therefore, expansionary fiscal policy is :
Families are allowed to deduct all daycare expenses from their federal income taxes, eventually leading to fall in tax revenue.
The individual income tax rate is decreased.
Defense spending is increased, because defense spending is government expenditure.
Therefore contractionary fiscal policy is:
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The Fed in order to correct any imbalances in the economy changes the money supply to influence aggregate demand. The fed in order to increase the money supply increases federal funds rate, discount rate, decreases reserve requirement, or conduct an open market purchase. These are called expansionary monetary policy. On the other hand, fed in order to decrease the money supply decreases federal funds rate, discount rate, increases reserve requirement, or conduct an open market sell. These are called contractionary monetary policy.
Therefore, the expansionary monetary policy is: