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CLEP Macro Economics

Marginal tax rate a rise in taxes that occurs when

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Marginal Tax Rate – a rise in taxes that occurs when before-tax income increases by one dollar Economists use the marginal tax rate to assess the effect of tax rates on possible economic stimulants Average Tax Rate – is acquired by dividing taxes by before-tax income Lower tax rates lead to higher potential output
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Automatic Stabilizers – are economic programs and policies that are in place and are designed to offset recessionary or expansionary periods Do not require legislation to be in place – they are already in place They do not prevent recessions or expansions o Examples: unemployment insurance, income taxes, food stamps, welfare payments Considered to be nondiscretionary types of fiscal policy Discretionary Fiscal Policy is generally targeted to a specific economic sector and can be easily changed Can be changed depending on economic situations Theory of Rational Expectations – used by Robert Lucas in 1995 Believe that individuals and businesses use all available information in order to make economic choices and anticipate the future Believe that fiscal policies are ineffective in altering the quantity of output in the economy Theory has not yet been proven or disproven Expansion Policies – are aimed at ending or reducing the effects of recession through increasing the monetary supply and lowering interest rates If the economy is slow, unemployment is high, and aggregate demand and production are low, the government can attempt to expand the economy thru various monetary and fiscal policies The Fed will purchase U.S. Treasury Securities Monetary Policies involve altering the money supply in order to combat recessions or periods of inflation While… Fiscal Policies involve changing government spending and taxes in order to fight recession or inflation Fiscal Policy – is aimed at determining the amount of direction of government spending, to combat recession and inflation Examples include changing government spending and taxes Increasing or decreasing government spending Increasing or decreasing taxes Supply-Side Fiscal Policies – know as Reagonomics Use tax cuts on the wealthy and decrease government regulation in order to increase business investment, improve technology, increase employment, and decrease prices and inflation Used in the 1980’s to combat the stagflation of the 1970s Not highly successful, resulted in large budget deficits Supply –Side economics – shift the Aggregate Supply (AS) curve to the right by actions such as favorable tax policies, increased potential output, increased business investment, and decreased government regulation in order to solve the problem of stagflation Cut taxes on the wealthy, in theory the wealthy will spend more Monetarist – economist that believe that increasing the money supply causes an increase in aggregate demand (AD), which in turn increases prices and increases output quantity (and vice versa) thus keeping a steady money supply to decrease economic recessions and expansions Keynesian Economics – believe that fiscal policies (such as changing taxes and/or government spending) should
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Marginal Tax Rate a rise in taxes that occurs when before...

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