If a nation’s economy is sliding into recession, and you are an economist, would you recommend...

If a nation’s economy is sliding into recession, and you are an economist, would you recommend that the government cut taxes and then make up for the drop in taxes collected by the government by cutting government spending? If not, what would you recommend? Explain your answer.

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Expert Solution

During the recession, people have low purchasing power as having less money in hand and this phase is characterized by low wages and increased unemployment.

As an Economist, I would recommend the following -

1. The cutting of taxes as that would increase the money in hand, hence the households will have more to spend for consumption hence inducing a multiplier effect on production and investment.

2. The government cannot reduce spending but in contrast, has to increase its spending especially on public works so that larger numbers get employed, hence the wages will be used for consumption hence increasing aggregate demand which will further as stated above induce a multiplier effect.

3. To ease out the trade so as to increase exports and reduce imports drastically which can form a portion of governement revenue which will fall due to cut in taxes.

During this phase, the government may have to run on a budget deficit and will have to meet the needs by borrowing from external sources. When the economy recovers the government can go back to its pre recession tax structure.

Rahul Sunny answered 1 year ago

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