Week 7 — Fiscal Policy Report: Multipliers, Tax Cuts, and the Debt — Traditional alternative (no AI)

Instructors: publish this instead of the adaptive version if you prefer, and unpublish or delete the adaptive one.

Assignment 7 of the term — work four short fiscal-policy problems, explain what each figure means, and tell a relative what a deficit headline does and does not say about the national debt.

This week you learned to name fiscal policy as expansionary or contractionary, to compute the spending and tax multipliers from the marginal propensity to consume, to keep the money multiplier out of fiscal questions, and to separate the deficit, a flow, from the debt, a stock. In Week 2 you met government purchases as one part of GDP, in Week 5 you shifted aggregate demand, and in Week 6 you read a recessionary gap. In this assignment you work four short problems, interpret each one, and explain to a relative what a deficit headline does and does not say. This week's lecture tutorial, quiz, discussion, and Model Workshop practice the same ideas from other angles.

The task

This report uses the week's illustrative numbers, constructed for this course and not real data: an economy whose marginal propensity to consume is 0.8, a road project of 20 billion dollars, a tax cut of the same size, and a budget with revenue of 400 billion dollars, spending of 450 billion dollars, and a debt of 1,000 billion dollars at the start of the year.

Work these four problems, showing every step on its own line:

1. In the illustrative economy, the marginal propensity to consume is 0.8. What is the spending multiplier?
2. In the same illustrative economy, the government spends 20 billion dollars more on a road project. In the simple model, by how much does real output change, in billions of dollars?
3. In the same illustrative economy, the government instead cuts taxes by 20 billion dollars. Using the tax multiplier, by how much does real output change in the simple model, in billions of dollars?
4. In the illustrative budget, the government collects revenue of 400 billion dollars, spends 450 billion dollars, and began the year owing 1,000 billion dollars. What does it owe at the end of the year, in billions of dollars?

Beside each figure, add one brief interpretation in plain words. For problem 1, say what the spending multiplier means for each dollar of new spending, and why the money multiplier, 1 divided by the required reserve ratio, does not answer this question. For problem 2, say what the change in output means for the economy, and name the curve that shifts, its direction, and what happens to the price level and real output. For problem 3, say what the change in output from the tax cut means, and why it is smaller than the change from a spending increase of the same size. For problem 4, say what the end-of-year debt means, and which of the two budget figures, the deficit or the debt, is a flow and which is a stock.

Explain it to a non-expert

A relative who drives for a delivery company sees a headline that says the government ran a deficit of 50 billion dollars this year, and asks whether that means the national debt is now 50 billion dollars. Write a 3–5 sentence message your relative could follow: what a deficit is and what the debt is in everyday words, how this year's deficit changed the debt, and one honest limit of what the figures can tell them, such as the fact that whether a deficit is wise is a judgment economists still argue about. Explain any technical term in everyday words. More than one good limit can be defended.

For a different, ungraded example, imagine a student who spends 300 dollars more than she earns this month and puts it on a credit card that already carried 1,200 dollars. Model message: "This month's shortfall is 300 dollars; that is the gap between what came in and what went out, and it is measured for one month. The card's balance is everything still owed, so it is now 1,500 dollars, not 300. A smaller shortfall next month would still add to the balance, only more slowly. Whether carrying that balance is a good idea depends on what the money paid for, which numbers alone cannot settle."

Use that pattern for the government's budget, with your own explanation.

Here is one honest note about scope: every number in this assignment is illustrative, so do not add a real deficit, debt, or multiplier figure from the news. Real-world multipliers are smaller than the simple model's and their size is debated, which is why this report keys only on the model's numbers.

How to work

1. Draft all four figures, the four brief interpretations, and your message for the relative.
2. Check your draft against the attached scoring criteria, criterion by criterion: is every multiplier the right one for its job, is the money multiplier kept out, is the deficit kept apart from the debt, and is every figure explained in plain words?
3. Revise at least one calculation or explanation, and write two or three sentences on what you changed and why.

Deliverables

Submit your fiscal-policy report with all four figures, their brief interpretations, your message for the relative, and your two or three sentences on the revision. You may submit it written, recorded as audio or video with a transcript, or as a labelled sketch of the aggregate demand shift with a short note; every form is graded by the same scoring criteria.

Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

The calculations, reasoning, and explanations must be your own work. This version is built to be completed without any AI tool, and no part of it requires one. Use the chapter, your notes, and a calculator or spreadsheet, and show every step so your work can be checked. Do not copy another student's figures or wording.

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