Exploration Fiscal Policy

6. The economy is moving into recession, and Senators Miller and Busch propose to stimulate the economy by cutting the tax on alcoholic beverages. They make the case that since the poor spend a larger part of their income than the rich on alcoholic beverages, and since the poor have a high marginal propensity to consume, this tax cut would have an unusually high impact on total spending and hence would be sound fiscal policy. List as many objections to their proposal as you can. How many of your objections have nothing to do with fiscal policy? In what way does this example illustrate the main point of the reading?

Review Question back Next