Autumn 2018

Attached article discusses the plans of the government of Japan to increase sales tax. a) What kind of policy is this, monetary or fiscal? b) What are the lags associated with this policy? c) Are these lags longer or shorter than the lags associated with the other kind of stabilization policy? d) Using the ISLM and ADAS diagrams, illustrate the effect of the tax hike on the economy. Label all curves and axes. Write equations for each curve. e) “[A]bout half of the revenue from the increase will go toward (1) education and (2) social spending.” Explain how (1) and (2) would affect Japanese economy. On separate graphs, illustrate effects of (1) on the economy in the short run and in the long run. f) “The remainder of the funds will help cover the government’s deficit…” Explain how this would affect the economy. g) “Most food will be exempt from the increase…” What is the rationale behind this exemptio                                                                                                                                      

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