Question

. Identify each of the following as (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. a. The personal income tax rate is lowered. b. Congress cuts spending on defense. c. College students are allowed to deduct tuition costs from their federal income taxes. d. The corporate income tax rate is lowered. e. The state of Nevada builds a new tollway in an attempt to expand employment and ease traffic in Las Vegas.

Answer 1

The lowering of personal and corporate income tax rates, as well as allowing deductions for college tuition, are all part of an expansionary fiscal policy aimed at increasing aggregate demand. Conversely, cutting defense spending is indicative of a contractionary fiscal policy aimed at decreasing aggregate demand. Building a tollway, although being government spending, does not fall within federal fiscal policy.

Step-by-step explanation:

In regards to fiscal policy actions, we can categorize:

• (i) Expansionary fiscal policy: This includes actions that increase aggregate demand by increasing government spending or decreasing taxes.
• (ii) Contractionary fiscal policy: This encompasses measures that decrease aggregate demand through reduced government spending or increased taxes.
• (iii) Non-fiscal policy actions: These are measures not directly related to government spending or taxation.

For the listed actions:

1. The personal income tax rate is lowered. This is (i) part of an expansionary fiscal policy as it increases disposable income and thereby can increase aggregate demand.
2. Congress cuts spending on defense. This is (ii) part of a contractionary fiscal policy since it reduces government spending, leading to a decrease in aggregate demand.
3. College students are allowed to deduct tuition costs from their federal income taxes. This is (i) part of an expansionary fiscal policy as it effectively reduces the amount of taxes they pay, increasing their disposable income.
4. The corporate income tax rate is lowered. Similar to the first point, this is (i) part of an expansionary fiscal policy because it increases after-tax profits for businesses and can encourage investment, boosting aggregate demand.
5. The state of Nevada builds a new tollway. While this is government spending, it's (iii) not part of fiscal policy in the federal context, as it is a state-level action with specific local objectives, despite potentially having expansionary effects locally.

Answer 2

Option, A , D, E = expansionary fiscal policy.

Option B = Contractionary fiscal policy

Option C = not a part of fiscal policy

Step-by-step explanation:

The expansionary fiscal policy occurred when there is a decrease in taxes and an increase in government expenditure (spendings). While contractionary fiscal policy occurs when taxes are increased by the government and there is a fall or decrease in government spendings. Therefore, Option A, Option D, and Option E are part of the expansionary fiscal policy.

Option B is a contractionary fiscal policy. While option C is not a part of fiscal policy