Sample Economics Essays On Fiscal Policy

Homework Question on Fiscal Policy

  • Download and Read “Questions about Fiscal Policy: Implications from the Financial Crisis of 2008-2009.” By N. Gregory Mankiw.
  • After reading the article, answer the following questions:
  1. During the crisis of 2008-2009, the Obama’s administration’s stimulus package of 2008 included both government purchases ($787 billion were invest in infrastructure, education, health, and renewable energy) and tax rebated (at least $300 tax rebate per eligible single individual and at least $600 for married couples) to stimulate the economy. From the textbook, we know that government purchases multiplier is larger than the tax multiplier. Since tax multiplier is smaller in the economy (per textbook), wouldn’t it make more sense to only focus on the government purchases in the economic stimulus of 2008? What empirical insight does the article by Mankiw provide on the decision of the Obama administration to have both large government purchases and tax rebates in 2008 as part of the stimulus?
  2. According to the article, what are some of the more subtle (indirect) ways that economy can be stimulated through tax incentives? Given what you have learned about the supply –side economics, defend a position on using taxes more/less than government purchases as a fiscal tool.
  3. Value-added tax (VAT) is a tax widely used in Europe, as discussed in the article. What would supply-side economists say about potential implications for the economy of VAT in the U.S. if such tax was to be implemented?

Homework Answer on Fiscal Policy

The Obama administration focused so much on government spending in solving the economic situation in the country. It would be more helpful if the United States government specialized and making more government purchases. This is because the endeavor increases consumption hence increases the aggregate demand than having to implement both tax multipliers and government purchases.

Government spending as a way of economic intervention led to the increased job opportunities while prices of goods and services increased to higher levels. In other words, the situation led to increased borrowing that created crowding out effects. This is where borrowing leads to reduced current consumption due to long-term interest rates for individual consumers. Therefore, government is not in a position to tackle the effects of the crisis in the short run period (Mankiw 178).

Homework Help

Increase in tax incentives by government to companies and individual are subject to the reduced spending by individuals who anticipate higher taxes in the future. Thus, government is deemed to benefits less by engaging in this endeavor. This is known as the retarding effect a condition brought about by the reduction in taxes on companies as well as individuals.Value added tax on the other hand is an effective and efficient method of collecting revenue from the public and companies.