Anne and Charlie Are Discussing the Best Possible Fiscal Policy

question 46

Multiple Choice

Anne and Charlie are discussing the best possible fiscal policy to bring the country out of a recession. Charlie wants to see government reduce taxes by $100 billion. Anne prefers to see government spending increase by $100 billion. Whose proposition would have the larger total impact on aggregate demand?

• A) Anne's, because the government has more information available to it than do households and firms
• B) Anne's, because all of the additional government spending will enter the spending stream, while part of a tax cut would be saved and not spent
• C) Charlie's, because households and firms have a higher marginal propensity to consume than the government
• D) Charlie's, because firms and households are better spenders than the government, whose spending decisions are bogged down in political debating

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Definitions:

Pollution Emissions

The release of pollutants into the environment, often as a byproduct of industrial operations, transportation, and other human activities, contributing to environmental degradation.

External Costs

Costs that are not borne by the parties involved in an economic transaction but are instead imposed on others or society.

Government Activities

Actions and operations conducted by the government including lawmaking, regulation, and public services.

Externality Rights

The rights pertaining to external effects of transactions, that affect third parties not directly involved in the economic transaction.