Which of the following fiscal policy changes would have a

Reference no: EM13379179

Which of the following fiscal policy changes would have a larger overall negative impact on AD and RGDP? Explain your answer in a paragraph or two with credible logics and analysis. Hint: Read my lecture notes on multiplier effects and also Ch. 9 in the textbook of Baumol and Blinder.

A) A program of tax hike, distributed uniformly across the households earning over $300K annually filing tax returns, amounting to $85 billion in total tax hikes.

Alternatively,

B) An $85 billion sequester (called automatic federal government spending cut) that went into effect on March 1, 2013. This was an across-the-board spending cut in federal government's various existing programs and services, including maintenance of major infrastructures and aviation traffic control systems.

Note: You may also use the AD-AS diagram as part of your analysis, but not required. However, explaining the answer with the concept of multiplier effects for these two alternative options is the right way to address this question.

Reference no: EM13379179

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