Question

1. Which of the two policies, monetary or fiscal, do you think would be more effective in a time of recession? Discuss and explain.

2. Tax cuts are debatable topics. Does it help or hurt the relatively poorer segment of the population? You can take either side but make sure to substantiate your thought with references.

Answer 1

Ans 1 In a recession, fiscal policy will involve tax cutting and more public spending and monetary policy will involve cutting interest rates to try and stimulate spending and investment. It should also weaken the exchange rate which will help exports.

In the aftermath of the 1992 UK recession, a cut in interest rates (which allowed a devaluation in the over-valued Pound) was very effective in leading to economic growth. The 1992 recession was primarily caused by high-interest rates, so cutting interest rates reduced burden on homeowners and business and allowed the economy to recover.

So it can be say that, during the time of recession, fiscal policy is more effective in comparison with monetary policy.

Ans 2 Tax cut is helpful for poor section, when tax cutting has done for Indirect Tax, as per the various report, Indirect tax is regressive in nature, as this tax is impose on good & services, so it majorly effect the poor section of society. So cutting of Indirect Tax is beneficial for poor section.

But cutting of direct tax i.e. Income tax, is not beneficial for poor section, because it generally imposes on rich people.

Thanks