Question

For each of the following fiscal policy proposals, determine whether the primary focus is on aggregate demand, aggregate supply, or both.

a. $1,000 per person tax reduction
b. a 5% reduction in all tax rates
c. Pell Grants, which are government subsidies for college education
d. government-sponsored prizes for new scientific discoveries
e. an increase in unemployment compensation

1. (i) both; (ii) supply-side; (iii) supply-side; (iv) both; (v) demand-side
2. (i) demand-side; (ii) both; (iii) supply-side; (iv) supply-side; (v) both
3. (i) demand-side; (ii) both; (iii) both; (iv) supply-side; (v) demand-side
4. (i) supply-side; (ii) demand-side; (iii) demand-side; (iv) both; (v) both
5. (i) supply-side; (ii) supply-side; (iii) demand-side; (iv) both; (v) both

Answer 1

Answer:

2. (i) demand-side; (ii) both; (iii) supply-side; (iv) supply-side; (v) both

Explanation:

a. $1,000 per person tax reduction  ⇒ focus on aggregate demand (more money for consumers to spend)

b. a 5% reduction in all tax rates  ⇒ focus on both aggregate demand and supply (more money for consumers and suppliers)

c. Pell Grants, which are government subsidies for college education  ⇒ focus on aggregate supply (more money for suppliers of college education)

d. government-sponsored prizes for new scientific discoveries ⇒ focus on aggregate supply (more money for suppliers of new scientific discoveries)

e. an increase in unemployment compensation  ⇒ focus on both aggregate demand and supply (more money for consumers resulting in higher prices and lower output)