The government currently has no debt. To alleviate an economic slow down, Congress proposes an increase in spending partially offset by an increase in the highest marginal tax rate. This will force the Treasury to issue new debt. According to which of the following economic theories would this stimulate the economy?
I. fiscal policy -
II. supply-side -
III. crowding out -
Click on the arrows to vote for the correct answer
A. B. C. D. E.B
Anytime the government runs a deficit, it can be considered a fiscal stimulus. However, since marginal tax rates were increased, the supply-side effect would be negative. The crowding out effect suggests that government borrowing will increase interest rates and partially offset the stimulate effects of the new spending.