【正文】 Progressive personal ine taxes. Note that during a recession unemployment is high so the government will pay out more in unemployment pensation at the exact time that tax receipts from corporations and individuals are low. This will increase the size of the deficit and also maintain aggregate demand during recessionary periods.e: Discuss the supplyside effects of fiscal policyThe SupplySide Effects of Fiscal Policy The main thrust of supplyside economics is that a reduction in marginal tax rates will give individuals and businesses the incentive to (1) invest and save, (2) work and increase their productivity in projects which provide taxable ine, and (3) reduce leisure time activities and participation in taxshelter programs. Or, in other words, a tax cut will increase the attractiveness of productive activities and reduce the attractiveness of less productive taxavoidance schemes and leisure activities. These behavioral changes will increase aggregate supply, increase output, decrease unemployment and reduce prices. Why do high tax rates tend to retard output? 1. They discourage work effort and reduce the productive efficiency of labor. 2. They adversely affect the rate of capital formation and the efficiency of its use. 3. They encourage individuals to substitute less desirable taxdeductible goods for more desirable nondeductibe goods. f: Explain the relationship among budget deficits, inflation, and real interest rates.Budget deficits and real interest rates: The crowding out model implies that deficits will increase the demand for loanable funds and thereby place upward pressure on the real rate of interest. The new classical model, however, implies that the higher expected future taxes will stimulate additional savings and thereby permit the government to expand its borrowing at an unchanged interest rate. The results of empirical studies on this question are mixed. If there is a relationship between budget deficits and interest rates it is very weak at best.Budget deficits, capital inflows, and net exports: The evidence supports the theory that crowding out occurs when foreign capital flows into the US, causing exports to fall and imports to rise.g: Explain how and why budget deficits and trade deficits tend to be linked.Some economists may argue that higher . interest rates will attract foreign investment funds, reducing the crowding out effect. This happens as foreign investors go to the foreign exchange markets to buy . dollars. Their buying demand drives up the value of the dollar. The resulting increase in the value of the dollar causes . exports to fall and imports into the . to increase. Thus, crowding out still occurs, yet it takes a different form. Instead of government borrowing crowding out demand for capital investment goods, demand for . dollars causes the dollar to appreciate causing . exports to decline and imports to increase.: Money and the Banking Systema: Identify and explain the three basic functions of money.The three basics functions of money:1. Medium of exchange money simplifies and reduces the cost of transactions 2. Unit of account money serves as a unit of measure by which the value of goods can be pared. 3. Store of value money enables value to be stored and transported.s additional ine ($1,000 x MPC). They will spend some [($1,000 x MPC) x MPC] and save the rest. This process continues indefinitely. You can see that the original $1,000 of ine expands or is multiplied into more than $1,000 of total ine for the economy.The amount of the expansion is called the expenditures multiplier and is equal to: M = 1/(1 MPC)Therefore, if investment spending increases by $1,000, total spending will increase by M x $1,000.The multiplier shows why small changes in C, I, or G can cause large changes in output. This is the key to the multiplier concept.e: Explain the importance of the expenditure multiplier within the framework of the Keynesian model.The proportion of each additional dollar of ine spent on personal consumption is called the marginal propensity to consume (MPC). Mathematically: MPC = additional consumption divided by additional ine.Assume you receive an additional $1,000 payment. You consume some of it ($1,000 x MPC) and save the rest. What happens to the amount you spent? It represents someone else39。 Real Interest Rates changes in real interest rates will help to stabilize aggregate demand and redirect economic fluctuations. If people expect inflation in the future, spending will occur today in order to avoid the future inflation. s price index).Example: A price index is for 2000 and at the end of 2001. What was the inflation rate during 2001?Answer: Inflation rate = ( – )/ = %f: Discuss the effects of inflation.Unanticipated inflation is a change in prices that was not expected by rational decision makers. When inflation is unanticipated, the purchasing power of every dollar is unexpectedly eroded. Therefore, any ine which is to be received in the future is now worth less in a presentvalue sense. Now, let’s think for a moment about potential winners and losers from a dose of unanticipated inflation. The definite losers would be people who are currently holding longterm contracts in which they are promised to receive a fixed dollar payment. The winners would obviously be the individuals or institutions which have made the promise to pay under those same fixedrate contracts.Anticipated inflation is expected by decision makers. Therefore, all contracts will be written to acmodate for the inflation. With anticipated inflation, variable rate contracts will be the preferred contract by lenders, and anyone wishing to obtain a fixedrate contract will have to pay a higher price for that contract. Once the anticipated inflation has been written into all contracts, no one will win or lose.: Preliminary Reading: Working with Our Basic Aggregate Demand/Aggregate Supply Mod