Question

What are some fiscal policies for improving a society's human capital?

Answer 1

Government Spending:

As the spending of the government increases, it increased the GDP (C+I+G+X, the G sector of the economy which is basically the government spending) of the nation. An example of this would be the construction of high ways by the United States government through the Department of Transportation. Because of this increase in spending, the U.S government would also end up with a higher deficit.he government spending increase shifts the aggregate demand to the right, resulting in a greater GDP and price level. However, the sole increase in spending was not the only factor causing the GDP. Because of the government spending, a multiplier effect rises in the economy as well, causing the money spent by the government to be used by other people to consumer more and more. This continuous cycle of consumption due to the flow of money originally spent by the government would then further increase the Aggregate Demand and the GDP.

Decrease in tax rates

As the tax rates decrease, people would have a higher marginal propensity to consume (the amount of income used for consumption for an individual) and thus having a higher consumption that shifts the aggregate demand to the right. A tax multiplier also occurs in this scenario as the more money spent by consumers are now cycled in the economy through different economic transactions and thus causing a greater shift in the Aggregate Demand (as shown in the graph).The government spending multiplier is written as 1/(1 - MPC), and the taxation multiplier is written as -MPC/(1-MPC). An interesting note about these multipliers is that the spending multiplier is always greater than the taxation multiplier since in government spending, all of it goes toward the cycle of money and increases Aggregate Demand; whereas in the case of tax multiplier, only a portion of the disposable income is recycled in the market, thus having a smaller effect than the spending multiplier.