Question

Why is spending by the U.S. government on scientific research at NASA fiscal policy while spending by the University of Illinois is not fiscal policy? Why is a cut in the payroll tax fiscal policy whereas a cut in a state income tax is not fiscal policy?

a) NASA spending impacts national economic goals
b) University spending is too small to affect the economy significantly
c) Payroll tax cuts directly influence aggregate demand
d) State income tax cuts are solely a state-level concern

Answer 1

Fiscal policy involves federal government actions on taxation and spending to influence the national economy. Spending at NASA by the U.S. government is fiscal policy, while spending by the University of Illinois is not, since it's not at the federal level. A cut in the federal payroll tax is fiscal policy; however, state tax cuts are not, because they are state concerns and not federal economic tools.

Step-by-step explanation:

Spending by the U.S. government on scientific research at NASA is considered fiscal policy because it is federal government spending that directly affects the national economy as a whole and can be used to achieve macroeconomic policy objectives, such as influencing aggregate demand, which impacts inflation, unemployment, and the economic growth. On the other hand, spending by the University of Illinois is not fiscal policy, as it does not stem from the federal government but from a state entity or the university itself, thus not primarily aimed at national economic goals.

Similarly, a cut in the payroll tax is fiscal policy because it is a change in federal taxation that directly influences aggregate demand by increasing the amount of money consumers have to spend. In contrast, a cut in a state income tax is not considered fiscal policy because it is a state-level action that specifically affects the residents of that state and is not used as a tool by the federal government to manage the national economy.