Which has a larger effect on aggregate demand: an increase in government expenditure or an equal sized decrease in taxes?

Submit a 4- to 5-page paper that addresses the following questions. Be sure to use references within the paper to support your answers. Show work for all calculations.

  1. According to Okun’s Law, if the normal rate of growth of GDP is 3% and the current unemployment rate is 6%, an increase in GDP growth to 4% would cause unemployment to change by what percentage?
  2. When total output, income, employment, and trade decline for 6 to 12 months, the economy is in what part of the business cycle?
  3. Which has a larger effect on aggregate demand: an increase in government expenditure or an equal sized decrease in taxes? Explain your answer.
  4. To eliminate a recessionary gap, what fiscal policy should the government pursue? Be specific.
  5. Indicate which of the following is expansionary OR contractionary fiscal policy:
  • Increasing income tax
  • Bailing out the auto industry
  • The purchase of military helicopters

Assignment Expectations

Use concepts from the modular background readings as well as any good-quality resources you can find. Be sure to cite all sources within the text and provide a reference list at the end of the paper.

Length: 4–5 pages double-spaced and typed.

The following items will be assessed in particular:

  • Your ability to understand an application of fiscal policy.
  • Some in-text references to the modular background material (APA formatting recommended).
  • The essay should address each element of the assignment. Remember to support your answers with solid references including the case readings.

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