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1. Was there a production gap when Kennedy assumed the presidency in Jan 1961? How large was it? (Assume a GNP growth rate of 3.3% starting in 1955 and project forward.)

“Production Gap” is the difference between real and potential GNP. From the data supplement, we can clearly see that the GNP in 1955 was 438 billion dollars.

So, the potential GNP with 3.3% growth rate annually is 438*(1+3.3%) 6 = 515.2 billion dollars.

However, the real GNP in Jan 1961 was 487.7 billion dollars.

The difference between them is 27.5 billion dollars.

2. What are the critical issues and assumptions of the tax cut debate?

(1) With suffering deficits for previous three years, tax reduction will enlarge the federal deficit. Whether the Government should take great risks to cut tax or they should use some prudent fiscal policies, such as reduce the expenditures, to balance the budget.

(2) The purpose of Kennedy administration to cut tax is to establish incentives for business investment and then try to reduce the unemployment rate. But if the company has already made enough profit and is not willing to make new investment, the tax reduction will be unnecessary and wasteful.

(3) The tax cuts policy is mainly for taxpayers with incomes of $10000 or more. They already have enough money to buy almost anything they want, so the extra money saved by the tax reduction will be saved. Therefore, it is better to modify the administration proposal in order to make it more effective.

3. Was this a supply or demand-side tax cut?

Supply-side economics is a school of macroeconomics that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services. 1 The purpose of tax cut is to stimulate the investment, and then try to reduce the deficit by producing more. Therefore, the tax cut of 1964 is a supply-side tax cut.

4. How successful was the tax cut of 1964? What general lessons do you conclusions suggest with...