1) One cornerstone of President George W. Bush's economic policy during his first term in office was tax cuts targeted towards high income and high net worth households. Under his proposals the marginal tax rate applied to capital gains taxes has been reduced, taxes on stock dividend have been eliminated and marginal tax rates on wage and interest income, particularly those applied to high income brackets have also been reduced. Please note that the Bush Tax Cut had been extended by Obama Admin for 2 more years, 2011 and 2012 (expired on Dec 31, 2012) followed by keeping most the tax break for middle class, but raised for household earning more than $300k per year. There has been a lot of discussion in the 2015Presidential campaign trail for 2016 general election for more possible tax cuts for corporations that may be expected to emerge in the Congressional debate in 2016 sessions.
a) What would be the short-run effects of tax cuts on interest rates and growth in RGDP given that the economy was in recession at the time of Bush's tax cuts? Contrast the Keynesian and crowding out perspectives on this question.
b) If in question (a) we were interested in the long run effects of the proposed tax cuts would a "supply side" economist give a different answer to this question than an economist who believed that federal budget deficits created significant "crowding out" effects? Explain.
2) "Market Slump Helps Sell Tax Cuts Now." (Headline from fall 2000) Explain from the standpoint of Keynesian macroeconomic theory why the slump in the stock market that began in the spring of 2000 help build support for Bush's tax cut proposal in his first year in office
3)The exchange rate of the $ has declined by 20% or more against the currencies of major US trading partners during the past year. Do you think the Fed welcomes continued weakness in the exchange value of the $ at this time? Explain your answer carefully.
4) What is the "crowding out" effect of budget deficits? What determines whether crowding out leads to a minor or major reduction in the impact of expansionary fiscal policies on Aggregate Demand?
5) Why do think the European Union countries decide to have a single central bank and a single currency, instead of just agreeing to maintain fixed exchange rates among their currencies?
6 a) What fiscal policies are recommended by conservatives' "supply-side" economists?
6 b) What assumptions about the behavior of savers and investors are required for conservative supply side theories of the benefits of tax cuts to be correct?
6c) Why did the experience of the 1980's following the massive Reagan tax cuts discredit supply side theory in the eyes of many economists?
7) How can large government deficits lead to large trade deficits?
8) Although the monetary authorities are concerned that the high level of the $ exchange rate is holding back the economic recovery, (see e.g. question 3a), they are afraid of a sudden major negative shift in investor sentiment towards the $. Explain why.