1. What happens to the following variables during an expansion?
a. unemployment compensation
b. welfare payments
c. income tax receipts
d. government budget deficits (surplus)
2. Suppose the government decides to increase taxes by $30 billion in order to increase
Social Security benefits by the same amount. How will this combined tax-transfer policy
affect aggregate demand at current prices?
3. If the AD shortfall is $800 billion and the MPC is 0.8,
a) How large is the desired fiscal stimulus?
b) How large an income tax cut is needed?
c) Alternatively, how much more government spending would achieve the target?
4. If the AD excess is $400 billion and the MPC is 0.9,
a) How much fiscal restraint is desired?
b) By how much do income taxes have to be increased to get that restraint?
5. From the perspective of someone using aggregate-demand and aggregate supply
analysis, what is the impact of a tax cut when the economy is operating above full
employment. Is this a wise policy? Why or why not?