Um am I missing something? I dont see where the answers are..
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I have 33 questions that have to be answered according to the articles; Read the following articles on the pro’s and con’s of the Bush tax cut passed in 2003. Then read through it again, paragraph by paragraph and answer the embedded questions. (Keep the answers really short.)
Answer the following questions about the first article:
“So far, people are continuing to spend despite the awful job picture because mortgage interest rates have dropped so low that homeowners have been able to refinance and get their hands on a lot of cash. We're talking real money here: Homeowners raised $130 billion through home-equity loans last year, nearly double the amount in 2001. But the borrowing binge will soon reach its natural limit.”
1. Where does Consumer spending fit in the circular flow model?
2. According to Reich, how have consumers been able to keep consumer spending up?
“Companies are also buyers. They buy equipment, supplies and raw materials. But companies have stopped buying because they're worried they won't have enough customers. Between January and March, business purchases of these sorts of capital goods dropped — the ninth drop out of 10 quarters.”
3. Where does company investment spending fit in the Circular Flow model?
4. What happens to Aggregate Demand when business spending declines?
5. Is there a multiplier effect? If so, what is it?
“The White House says businesses need investment tax breaks, but that's nonsense. Interest rates are so low that businesses could easily afford more capital goods if they wanted them. But they won't buy more until they know there's a healthy market for what they produce.”
6. What does this say about business expectations?
7. How do business expectations affect Investment Demand?
“Government is also a purchaser, and government spending is way up.”
8. Where does government spending fit in the Circular Flow model?
9. What happens to Aggregate Demand when government spending increases?
10. Is there a multiplier effect? If so, what is it?
“So how do we get out of this quagmire? Not by giving rich people bigger tax breaks, as Bush wants to do. Rich people won't spend any extra money they get. They already spend what they want to spend. That's the definition of being rich.”
11. In your opinion, would the “rich” spend more or less of a tax cut than the “poor” (or middle class) will? Why?
(There is no right or wrong answer to this one. I just want to see if you can argue a position from an economic standpoint one way or the other. You might want to start by defining "rich." Also, note that we tax income in this country, not wealth.)
“The best and the fastest way to get more money into the pockets of people who are likely to spend it quickly is to cut the taxes of average working people. Most people pay more in payroll taxes — primarily for Social Security and Medicare — than they do in income taxes. So a temporary cut in payroll taxes — say, by exempting the first $15,000 of income from payroll taxes — would put an extra $1,200 into most working people's wallets this year alone.”
12. What does cutting tax rates do to the multiplier?
13. If we did this, what should happen to Consumption and Savings?
14. What should happen to Aggregate Demand and Real GDP?
15. If it is a “temporary cut in payroll taxes,” how will this affect consumer expectations?
16. Business expectations?
“And because businesses wouldn't have to pay their portion of that payroll tax, they'd be encouraged to keep more workers on the payroll.”
17. How would cutting payroll taxes paid by business affect Aggregate Supply.
18. What should happen to Real GDP? The price level?
19. How would it affect employment?
Now look at the second article and answer the following questions.
“It would be a valid concern, too, if tax cuts simply extracted money from the economy. Then it would be a bad idea to slash our collective income just as our expenses were set to rise. It would make much more sense to go with $550 billion or $450 billion or $350 billion -- or whatever number congressional skeptics such as Sens. George Voinovich, R-Ohio, and Olympia Snowe, R-Maine, are currently embracing.
But that’s not how tax cuts work. Properly constructed, they result in more jobs, more savings and more income.”
20. If marginal tax rates are cut, what happens to the multiplier?
21. What happens to consumption and savings?
22. How does that affect Aggregate Demand? Real GDP?
23. According to the AS/AD model, how does a tax cut “result in more jobs, more savings and more income?”
“Indeed, a tax cut that encourages long-term growth by making it cheaper for people to invest -- and eliminating the tax individuals pay on dividends would do that in spades -- is exactly what our fragile economy needs…”
24. How does making it “cheaper for people to invest” affect capital (one of the factors of production.)
25. Would this increase or decrease the amount of capital available to the economy? (Alternately, would capital become more expensive or less expensive?)
26. How would this affect Aggregate Supply?
“We should never try to induce consumer spending at the expense of our long-term economic health. As the Congressional Budget Office noted in an analysis of the president’s budget, encouraging higher government spending and private consumption hurts economic growth in the long term.”
27. Going back to the productions possibilities curve, how does consumption or higher government spending today hurt economic growth?
28. Why would more capital investment today encourage “growth in the long term.”
“A dividend tax cut is an excellent way to do this. It’s why the $726 billion plan would lead to more business expansion and more jobs -- an annual average of 914,000 more jobs over the next five years, a recent Heritage Foundation analysis found.”
29. Why would reducing the cost (or increasing the return) of capital increase jobs?
Start with what happens to Aggregate Supply.
“Tax-cut critics have one more ace up their sleeve, however -- deficits. Look at what happened when Congress enacted a big tax cut in the 1980s, they say. The budget was plunged into red ink because the 1981 cut drained federal revenues.
But facts sometimes have an inconvenient way of wrecking such tidy cause-and-effect arguments. Take a look at the revenue figures for the 1980s, and a different picture emerges. In 1980, the last year before the tax cut, the government took in $956 billion (in inflation-adjusted dollars). Did government revenues drop like a stone, per the hand-wringing predictions tax-cut opponents made then? On the contrary. In all but two of the next 10 years, revenues rose as much as $265 billion (and even in the two “off” years, they came close to matching it).”
30. Why might cutting tax rates increase tax revenues?
“They’d rather stick with short-term stimulus, it seems.
Yet it stands to reason that when individuals are faced with job and war uncertainties, providing them with one-time tax rebates will do little to change their outlook, and it’s outlook that drives behavior -- how much people save, spend and invest.”
31. How do consumer expectations affect Aggregate Demand?
32. How do business expectations affect Aggregate Demand?
33. Having read and analyzed both positions, what’s your opinion? Why?
(Again, no right or wrong answer, just a question of how well you can make an economic argument.)