UT MSF - DALLAS

MACROECONOMICS
Summer 2020
Homework 1

Please complete neatly and professionally. These questions are based on the Fiscal Policy Self-
Study Module. You are free to use this Word Document as you see fit to submit your answers.
But when you submit, please first convert to PDF and then upload using the portal on Canvas.
Other file formats have caused difficulty in the past.

Due via PDF upload: Monday, June 20, 8am.

This homework addresses the material from the Fiscal Policy Self Study Module.

1. What is the simple fiscal multiplier? What exactly does it tell us?
2. What determines the magnitude of the simple fiscal multiplier?
3. Why is the simple tax multiplier less than the simple fiscal multiplier?
4. What is crowding out? How does it reduce the multiplier effects of an increase in
government spending or a tax cut?
5. What is Ricardian Equivalence? How does it reduce the multiplier effects of a tax
cut?
6. If the federal government attempts to stimulate AD in the economy using a tax cut, ti
what segment of the population should the tax cut be targeted in order to magnify
its effect on AD?
7. With the past tax cut plans passed during both the Bush and Trump administration,
tax cuts were targeted toward higher-income people, and to avoid Congressional
rules regarding the effect on the deficit that would have involved a 2/3 majority to
pass the plans, they structured the tax cuts to expire once their administration is
over (then the next administration gets blamed for increasing taxes). What is the
impact on AD of making the tax cuts temporary?