Question

Compare and contrast the use of government spending changes versus tax changes as a means of influencing the course of the economy. Is one or the other preferable in specific situations? Imagine for a moment that you have two roommates, who each have opposing viewpoints on nearly everything, including politics and economics. Taylor is adamant that the best way to manage the economy is through tax changes, while Morgan insists that it’s better to adjust the economy through government spending. What would a Neoclassical economist say? What would a Keynesian economist say? Which roommate do you agree with, and why? Find a news article to help support your opinion. Summarize the article and include the link to in your response.  Remember to cite your sources.

Answer 1

The battle between government spending and taxes as a step of affecting the course of any economy is very old and goes back to Keynesian and Neoclassical times. This is normally called financial policy activities. The government utilizes either or both methods to manage the economy.

As, the federal government spending increases the demand, and thus, general GDP while the taxes decrease the household's disposable earnings. Both of these measures are used to achieve fiscal policy goals. Say, when the economy is sluggish, the government increases its spending and reduces taxes at the same time. While, in an overheated economy, the government decreases its spending and increases its taxes to minimize the development for some time. Among the situations arises when there is a contraction in the economy due to a reduction in earnings, the receipts from taxes likewise reduce. Higher taxes are charged from higher-income brackets individuals, balancing out the loss of income for the lower-income brackets. The opposite occurs when earnings increase and invoices from taxes increase. Federal government spending handles circumstances in other methods. During contractions, the federal government keeps its previous level of spending and presents the benefits for the general public like public assistance and unemployment insurance.

It is observed that both approaches work in their own ways in times of requirement. Thus, both Taylor and Morgan are right in their opinion, however, both must understand that sometimes, the two techniques together work to handle the economy.

Classical economics stresses the function of the free-market in supporting the economy while Keynes, was of the opinion that the government needs to take essential actions to handle the economy successfully. In this circumstance, a Neoclassical economist would state that the fiscal policy would not trigger long-term benefits to the economy while the Keynesian financial expert would support the use of tax and federal government costs in managing the economy effectively.