Question

A. Explain why a balanced budget amendment could lead to increased economic instability.

B. Explain why a change in government spending has a larger effect on GDP than an equal cut in taxes.

C. Explain why GDP is not a measure of social welfare

Answer 1

A) a balanced budget amendment could lead to increased economic instability. A balanced budget is when the expenditure is equal to the revenue.

So in order to balance it if the government increases it's spending and lowers taxes at good times and reduces spending and increases taxes during recessions it will weaken the economic activity and also worsen the recession. As a result there will be an increase or decrease in economic activity. There will be high job losses and recession may last longer and deeply affect the economy.

B) an increase in the government spending has a larger effect on GDP than an equal tax cut because the increase in government spending acts like a multiplier.

If there is an increase in the government spending there will be an increase in the autonomous government spending. This will mean that there will be growth and development in the nation. More people will get work and get increased income which will further lead to the betterment of the society.

On the other hand a tax cut will mean that people will pay less tax to the government but there is no development, growth and no increase in the income of the people. Thus government spending is more beneficial and have a larger impact on the GDP than a tax cut.

C) GDP is not a measure of social welfare because it is a measure of output. GDP measures the value of goods and services produced. It does not measure who gets the goods and services. Thus it fails to account the non market transactions, wealth distribution and also the types of goods and services produced in the economy.

Only some people in the society may be getting the goods and services and obtain the welfare does not mean that all the people in the society are well off. Thereby GDP is not a measure of social welfare.