Reference no: EM133223486

In Module 6 you learned about how fiscal policy is conducted in the U.S. and the decisions that are made in Congress to approve new bills to counteract the effects of economic problems. In addition, you learned that fiscal policy can be quite powerful in affecting the real GDP and price level through the multiplier effect. Last, you learned how fiscal policies affect the government budget. In this assignment, you will play the role of a congressman/congresswoman faced with fiscal policy decisions in light of what you have learned in Module 6 regarding the above-mentioned topics.

Imagine you are a congressman/congresswoman trying to decide on which of the two options below to vote for. An economist asked to testify before Congress is explaining that based on a recent study, to increase the growth rate of RGDP from 2% to 3%, major increases in government spending, or major tax cuts need to be passed by Congress soon. The economist explains two alternative options to boost economic growth to the desired level:

Option 1: Increase government spending on infrastructure by $20 billion.

Option 2: Lower business/corporate taxes by the same amount, $20 billion.

Part I

1. Briefly explain how does each option affect the government budget?

2. Explain how much would each option change the amount of the existing budget deficit.

Part II

1. Which of these two options will likely have the largest impact on the level of RGDP, and consequently, the growth rate of RGDP? Explain your answer by focusing primarily on the concepts of government spending multiplier, GM, and tax multiplier, TM.

2. Which option do you think the economist would recommend?

3. Based on the comparative analysis done by the economist, if you were indeed a congressman/congresswoman, which option would you vote for, and why?

Recall these formulas:

Change in RGDP = GM * Change in G GM = 1/(1 - MPC)

Change in RGDP = TM * Change in T TM = -MPC/(1-MPC)

For your calculations of GM and TM, use MPC = 0.8

Part III 

Would the answer to question 3 above change if, as a congressman/congresswoman, you were very interested in getting reelected, and if:

1. A powerful lobby group representing a large corporation strongly favors a significant corporate tax cut in their specific industry. State if your answer would change in this scenario, and explain why.

2. All businesses, from sole proprietorships and partnerships to medium size businesses and large corporations would greatly benefit from a proportional business tax cut. State if your answer would change in this scenario, and explain why.