Imagine the government starts offering free meals to college-going students. It
ID: 1209419 • 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. unemployment compensation by the government is an example of transfer payment. Decline in this payment means that government is cutting down on the transfer payments.
b. This is an example of direct government spending and is considered a component of aggregate demand of the economy.
c. It is also direct government spending as it does not involve corporate taxes under its ambit.
d. A progressive tax system is an example of automatic stabilizer.