Question

Describe how the government uses tax and spending policy to alter the economic environment? Is each fully at the discretion of the government, or are there boundaries on how they establish this policy each year? Economists describe Growth Policy and Stabilization Policy as two significant theories that drive policy making. What is each? What are the benefits and drawbacks of each? When is each ideally used?

Answer 1

Government does not have its own money. Its receipts come from individual income tax, corporate income tax, estate and gift tax, social insurance tax and excise tax. Government spending can be divided into three category : mandatory spending, discretionary spending and interest on fedral debt. The Government play a key role by increasing its spending in order to boost economic growth. With so much spending is going on his area, it become important for the policy - maker to review whether the government spending is actually promoting economic growth or not.

Economic stability enables other macro economic objective to be acheived, such as stable price and stable and sustainable growth.

Sustainable growth are: i) Technology Policy, ii) Human capital development, iii) Reducing red - tape and de - regulation, iv) Providing Incentives, v) Tax reform, vi) New market and vii) Infrastructure.

Stabilization Policy are: i) Fiscal Stabilisers, ii) Floating exchange rate, iii) Flexible labour market and iv) Monetary policy.

Stabilization policy - keeping the economic as close as possible to the long run growth path. On the other is Growth policy - ploicy that attempts to maximize the long run growth rate.

I believe that stability is important to people(i.e, that utility is lower where there is more economic uncertainty), and because of this stabilization policy can be justified on its own terms, there's no reson to insist that stabilization policy maximize growth. Stabilization had been solved with monetary policy, growth was the major question to be solved.