Imagine the government starts offering free meals to college-going students. It
ID: 1209418 • Letter: I
Question
Imagine the government starts offering free meals to college-going students. It may reduce private spending Similarly, during recession, the tax rate for super rich increases as compared to other citizens. This is an example of automatic stabilizer Based on these examples, discuss which of the following are examples of direct expenditure offset to fiscal policy and which are the examples of automatic fiscal stabilizer. Provide a rationale for your selection. As the economy starts to recover from a severe recession and more people go back to work, government-funded unemployment compensation payments begin to decline. In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use. A government agency arranges to make loans to businesses whenever an economic downturn begins As the economy heats up, the resulting increase in equilibrium real GDP immediately results in higher income tax payments, which dampen consumption spending somewhat. The government increases its expenditures without raising taxes. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending. The government finances the construction of a classical music museum that otherwise would never have received private funding. To stem an overheated economy, the president, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on government programs.Explanation / Answer
a) Automatic stabilizer as these compensation programs go up and down without any intervention.
b) Direct expenditure as buying of assets is a single use step i.e. a one time measure from government
c) Direct expenditure as government will directly input money in business in form of loans when in recession.
d) Automatic stabilizer as these tax payments increase in expansion and automatically decrease in recession.
e) Direct expenditure as without intervention the effect of this action will not go from contractionary to inflationary if economy goes from expansion to recession.
f) Direct expenditure as without intervention the effect of this action will not go from contractionary to inflationary if economy goes from expansion to recession.
g) Direct expenditure as without intervention the effect of this action will not go from contractionary to inflationary if economy goes from expansion to recession.