05 Jun Download and Read “Questions about Fiscal Policy: Implications from the Financial Crisis of 2008-2009.” By N. Gregory Mankiw.
Question
Download and Read “Questions about Fiscal Policy: Implications from the Financial Crisis of 2008-2009.” By N. Gregory Mankiw.
After reading the article, answer the following questions:
1) During the crisis of 2008-2009, the Obama’s administration’s stimulus package of 2008 included both government purchases ($787 billion were invest in infrastructure, education, health, and renewable energy) and tax rebated (at least $300 tax rebate per eligible single individual and at least $600 for married couples) to stimulate the economy. From the textbook, we know that government purchases multiplier is larger than the tax multiplier. Since tax multiplier is smaller in the economy (per textbook), wouldn’t it make more sense to only focus on the government purchases in the economic stimulus of 2008? What empirical insight does the article by Mankiw provide on the decision of the Obama administration to have both large government purchases and tax rebates in 2008 as part of the stimulus?
2) According to the article, what are some of the more subtle (indirect) ways that economy can be stimulated through tax incentives? Given what you have learned about the supply –side economics, defend a position on using taxes more/less than government purchases as a fiscal tool.
3) Value-added tax (VAT) is a tax widely used in Europe, as discussed in the article. What would supply-side economists say about potential implications for the economy of VAT in the U.S. if such tax was to be implemented?
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