When China was hit by the 2008 global crisis, its government increased infrastructure investment spending by building miles and miles of highways and train systems. Source: The Nation, October 6, 2012.

1. What effect would this increase in government infrastructure spending have on the budget deficit and real GDP? 2. What would be the effect of increased government infrastructure spending on jobs? 3. If the Chinese government freezes its current spending and chooses to reduce taxes, what would be the effect on investment and the level of employment?

Exercise 3 Senate approves Obama tax cut plan The U.S. Senate has passed legislation extending the Bush-era tax cuts for middle-class citizens earning up to $250,000 annually. Source: Financial Times, July 26, 2012. Fact: Middle- and low-wage earners spend all of their disposable income. Those who enjoy high wages save a signicative portion of their disposable income. 1. Explain what effect is sought by extending the tax cuts to middle-class Americans but not to high-income families. 2. Explain why the effect of the tax cuts depends on who is a beneficiary of the tax cuts.

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