Please read the case scenario illustrated below and answer the following questions.
Question 1: What possible macroeconomic arguments might George Bush use to defend his tax cuts at this time.
Question 2: Why do you think the IMF is concerned that these tax cuts may be bad economic policy, and not just for the US, but for the world economy?
Question 3: What would happen to the growth rate of the money supply if foreigners lost confidence in the US dollar as a result of passage of Bush's tax cut package and the Fed was trying nonetheless to maintain its current low federal funds rate target? Explain briefly.
Case Scenario:
George Bush this past spring pushed a massive tax cut through congress, whose centerpiece was elimination of the income tax on dividends and acceleration of previously enacted rate cuts on upper income tax brackets. The IMF in an unusual move sharply criticized these potential tax cuts.
IMF Says Bush Tax Cut
Is Poor Policy, Ill Timed
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- The International Monetary Fund delivered a sharp rebuke of the Bush administration's fiscal policy, saying the White House has proposed poorly timed and probably unnecessary tax cuts while failing to confront the looming costs of Medicare and Social Security.
The international lender, better known for scolding wayward developing countries than the U.S., its single biggest shareholder, does regularly give policy advice to rich economies. Its appraisal of U.S. policy, however, was unusually negative and specific.
At a news conference, IMF research director Kenneth Rogoff said, "Suppose for a moment we were talking about a developing country that had a gaping [trade] deficit year after year as far as the eye can see, a budget with ink spinning from black into red, open-ended security costs and an exchange rate that has been inflated by capital inflows. With all that I think it's fair to say we'd be pretty concerned." The U.S. isn't a developing country, he said, but, nonetheless, for the global economy "the tax cut ... on top of ongoing security expenditures seems awkwardly timed."