For each of the following situations identify whether it is an example of expans

Question

For each of the following situations identify whether it is an example of expansionary discretionary fiscal policy, contractionary fiscal policy, or fiscal policy in the form of automatic stabilizer.

a. During 2009, tax revenue for Macrovia (this is a hypothetical country) falls as the economy enters a recession. 5 points.

b. During 2009, in light of projected deficiencies in AD, Macrovia's legislature authorizes an expenditure of $200 million in order to build a new hydroelectric dam. 5 points

c. In 2012, fearing a too rapidly expanding economy, Macrovia adopts a budget that calls for 10% spending cuts in all government departments for the following fiscal year. 5 points.

d. In 2011, unemployment benefits rise 5% in resonse to rising unemployment in Macrovia. 5 points.

Explanation / Answer

a)fiscal policy in the form of automatic stabilizer Automatic stabilizers, without specific new legislation, increase (decrease) budget deficits during times of recessions (booms). They enact countercyclical policy without the lags associated with legislative policy changes.

b)Expansionary fiscal policy involves government spending exceeding tax revenue, and is usually undertaken during recessions.

c)Contractionary fiscal policy occurs when government spending is lower than tax revenue, and is usually undertaken to pay down government debt.

d)fiscal policy in the form of automatic stabilizer

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