What is the difference between federal purchases and federal expenditures? Give an example of an automatic stabilizer. Explain how automatic stabilizers work in the case of recession. How does expansionary monetary policy increase spending in the economy compared to how expansionary fiscal policy increases spending in the economy? 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.

What is the difference between federal purchases and federal expenditures?

Federal purchases are the federal government acquisitions of goods and services. For example, weapons for the military, or supplies for the Postal Service.

Federal expenditures include not only federal purchases but also federal transfers. Federal transfers of income are for example social security and unemployment benefits.

Give an example of an automatic stabilizer.

A corporate tax is one example. Corporate taxes are based on profits. When the economy is growing, firms earn more profit, and thus, pay more corporate tax. When the economy is in recession, firms earn less profit, and as a result, pay less corporate tax.

Explain how automatic stabilizers work in the case of recession.

Some automatic stabilizers (corporate tax, income tax, sales tax) adjust down in the case of recession, while others (welfare and unemployment benefits) adjust up in the case of recession. This is why they are called automatic stabilizers: they adjust according to the state of the economy, and help reduce the overall effects of the economy cycles.

How does expansionary monetary policy increase spending in the economy compared to how expansionary fiscal policy increases spending in the economy?

Expansionary monetary policy increases the money supply. The central bank (in the U.S., the Federal Reserve), lowers the interest rate by increasing the amount of money in the economy. This promotes investment.

Expansionary fiscal policy results in the lowering of taxes, the expansion of government spending, or both. This actions also help the economy grow, although they can result in goverment deficits in some cases.

a. The personal income tax rate is lowered. - Part of expansionary fiscal policy

The lowering of taxes, as explained above, is a form of expansionary fiscal policy.

b. Congress cuts spending on defense. - Contractionary fiscal policy

Government spending cuts are a form of contractionary fiscal policy because they contract the amount of fiscal outlays.

c. College students are allowed to deduct tuition costs from their federal income taxes - Expansionary fiscal policy

This policy is a tax cut in practice, because college students will end up paying less income tax. For this reason, it is expansionary fiscal policy.

d. The corporate income tax rate is lowered. - Expansionary fiscal policy

As explained above, tax cuts are a form of expansionary fiscal policy.

e. The state of Nevada builds a new tollway in an attempt to expand employment and ease traffic in Las Vegas. - Expansionary fiscal policy

Increases in goverment spending are expansionary fiscal policy. Here, the state of Nevada is spending more to build a new tollway.

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