Reduced Multiplier from Anticipated Future Taxes
A fiscal stimulus can have a diminished effect on the economy if households anticipate that current government spending will be financed by future tax increases. In response, households may increase their savings to prepare for these future tax liabilities. This precautionary saving leads to a reduction in current consumption, which counteracts the initial stimulus and results in a smaller multiplier.
0
1
Tags
Economics
Economy
Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
Science
Related
Effect of Fiscal Expansion at Full Capacity Utilization
Reduced Multiplier from Anticipated Future Taxes
An economy is operating at its maximum productive capacity, with very low unemployment and high factory utilization rates. The government then launches a large-scale public works program, significantly increasing its spending. Which of the following outcomes is the most likely immediate consequence of this government action?
Impact of Government Spending in a Booming Economy
A government significantly increases its spending by borrowing from the public. Assuming the economy is operating near its full potential, arrange the following events in the logical sequence that illustrates the 'crowding out' effect on private investment.
Government Spending Under Different Economic Conditions
Mechanism of Private Investment Reduction
An increase in government spending will always result in an equivalent decrease in private spending, regardless of the economy's level of resource utilization.
Match each economic scenario with the most likely impact of a significant, debt-financed increase in government spending.
A primary mechanism for crowding out occurs when increased government borrowing to finance spending leads to a rise in ____, making it more costly for private firms to fund new projects.
A government decides to fund a major new highway system, significantly increasing its expenditure. In which of the following economic scenarios would this action be most likely to cause a substantial decrease in private investment and consumption?
Evaluating a Fiscal Stimulus Proposal
Learn After
A government announces a large, one-time spending program to stimulate the economy, financed entirely by issuing new debt. Widespread media reports and economic analyses lead the public to believe that this new debt will be repaid through higher taxes in the future. Given this public expectation, what is the most likely outcome for the stimulus program's effectiveness?
Evaluating Fiscal Stimulus Financing
Comparing Fiscal Stimulus Effectiveness
Household Response to Debt-Financed Government Spending
A government's fiscal stimulus program will have a more potent effect on aggregate demand if the public is confident that the program will be funded by future tax increases, as this ensures the government's long-term fiscal responsibility.
Maximizing Fiscal Stimulus Impact
A government is considering different ways to finance a new public works project. Match each financing announcement with its most likely immediate impact on the effectiveness of the spending (i.e., the size of the spending multiplier).
Impact of Fiscal Policy Announcements on Household Savings
When a government funds a new spending program by issuing debt, households that expect this debt to be repaid with higher taxes in the future are likely to increase their current ______, which in turn reduces the overall spending multiplier.
A government announces a new, large-scale infrastructure project funded entirely by issuing new bonds. Arrange the following events into the logical sequence that describes how public anticipation of the future can reduce the project's immediate economic stimulus effect.