One of these answers are wrong. May somebody tell me which one and why? Thanks! 1. a. Why is the amount of transfer payments important as a percentage of total government expenditure? The size of transfer payments as a percentage of government expenditure is important because this type of expenditure is "non-productive". The theory that fiscal policy can stimulate Aggregate Demand and that some deficit can be good for the economy rests on how productive those funds will be when spent. Spending toward goods and services motivates growth but spending on transfer payments does not. It is easy to see why Government spending on roads and education act as investment toward growth. b. Show the effect of and difference between tax on income and tax on interest, Add a one sentence explanation to the graph to explain the effect and difference. One tax in influences the labor decision, one in influences savings and investment decisions. The tax on interest is more severe because it effects the growth potential in the economy. The loanable funds market has a role different from the labor market and production function. A tax on labor effects the level that the economy is at - it lowers Real GDP. A tax on interest actually affects the growth potential because people are disincentivized from contributing funds that feed capital accumulation. That drives the interest rate up and businesses away from growing their business. The economy with labor tax starts at a lower level but grows with the same vigor as with no tax. The economy with the tax on interest starts at a higher level but grows more slowly. c. Explain the difference between structural and cyclical deficit. A structural deficit is the result of the level of potential GDP lowering relative to its previous level but a cyclical deficit means that potential GDP remains at the original level but Real GDP lowers away from it. These deficits originate in automatic fiscal policy. When the economy is operating below potential GDP the amount of money the government is taking in via tax is naturally going down as a result and the amount of spending via transfer payments is going up because the economy is below full employment so more people are claiming unemployment benefits for one example. d. Which seems to be more severe? Due to the shift in potential GDP with structural deficits, this type seems more severe. By contrast, the economy is expected to return to its previous level of production when a cyclical deficit occurs as part of the business cycle but due to the permanent nature of the structural decline in GDP the economy will have to undergo a technological stimulus or capital accumulation resulting in growth to find itself back at its previous level. e. How can fiscal policy be used to stimulate the economy? Primarily when the economy is experiencing recession fiscal policy, as the theory tells us, can boost aggregate demand by either increasing e.

1. One of these answers are wrong. May somebody tell me which
one and why? Thanks!
1.
a. Why is the amount of transfer payments important as a
percentage of total government expenditure?
The size of transfer payments as a percentage of government
expenditure is important
because this type of expenditure is "non-productive". The
theory that fiscal policy can
stimulate Aggregate Demand and that some deficit can be good
for the economy rests
on how productive those funds will be when spent. Spending
toward goods and services
motivates growth but spending on transfer payments does not. It
is easy to see why
Government spending on roads and education act as investment
toward growth.
b. Show the effect of and difference between tax on income and
tax on interest, Add a one sentence explanation to the graph to
explain the effect and difference. One tax in influences

2. the labor decision, one in influences savings and investment
decisions.
The tax on interest is more severe because it effects the growth
potential in the economy.
The loanable funds market has a role different from the labor
market and production
function. A tax on labor effects the level that the economy is at
- it lowers Real GDP. A
tax on interest actually affects the growth potential because
people are disincentivized
from contributing funds that feed capital accumulation. That
drives the interest rate up
and businesses away from growing their business. The economy
with labor tax starts at
a lower level but grows with the same vigor as with no tax. The
economy with the tax
on interest starts at a higher level but grows more slowly.
c. Explain the difference between structural and cyclical deficit.
A structural deficit is the result of the level of potential GDP

3. lowering relative to its
previous level but a cyclical deficit means that potential GDP
remains at the original
level but Real GDP lowers away from it. These deficits
originate in automatic fiscal policy. When the economy is
operating below potential GDP the amount of money the
government is taking in via tax is naturally going down as a
result and the amount of spending via transfer payments is
going up
because the economy is below full employment so more people
are claiming unemployment benefits for one example.
d. Which seems to be more severe?
Due to the shift in potential GDP with structural deficits, this
type seems more severe. By contrast, the economy is expected
to return to its previous level of production
when a cyclical deficit occurs as part of the business cycle but
due to the permanent nature of the structural decline in GDP the
economy will have to undergo a technological
stimulus or capital accumulation resulting in growth to find
itself back at its previous
level.

4. e. How can fiscal policy be used to stimulate the economy?
Primarily when the economy is experiencing recession fiscal
policy, as the theory tells
us, can boost aggregate demand by either increasing expenditure
(G) or cutting taxes.
This impacts aggregate expenditure (Y) moving AD outward
and through the multiplier
effect, C increases moving AD further outward until long-run
equilibrium is reached.
f. What is the difference between automatic and discretionary
fiscal
policy?
Automatic fiscal policy: with the laws currently in place
directing tax rate and expenditure plans, when the economy
naturally shifts as part of the business cycle the
amount of revenue or receipt naturally changes.
Discretionary fiscal policy: the conscientious change in
spending program or tax law to
stimulate production and jobs.

5. g. What are the lags that affect fiscal stimulus? Are they
important?
The lags are recognition, law-making and impact.
To demonstrate their importance, imagine that the economy is in
a recession. Via unseen forces the economy starts pulling itself
out of the recession (say, all people become
jointly optimistic about the future which affects their
productivity positively) but the
government doesn't recognize this so seeks to implement its
own remedy. By the time
they realize what should be done, pass the law and years later it
takes full effect, the
economy via the natural force has pulled itself out of recession
so the law to spend more 2 or 3 years after it was originally
passed now sends us into high inflation and high deficit and
debt.