Question

Were the Bush Tax Cuts a Good Idea?

From the reading this week, you will learn about the basic model that we use to explain the entire economy, aggregate demand-aggregate supply. All of the macroeconomic material is related to this model: GDP, inflation, unemployment. In chapter 12, you’ll read about how fiscal policy can affect the economy. The fiscal policy tools that you read about in this chapter are meant to adjust the aggregate demand side of the economy. But there is a debate about whether this is the side of the market that should be targeted. Some economists and policymakers would rather focus on policies that shift the aggregate supply (so-called “supply-side policies”).

1) Explain one of the reasons why policymakers usually focus on demand-side policies to achieve their macroeconomic goals as opposed to the supply-side ones. Be sure to include concepts from the chapters. Provide one example of a demand-side policy and explain why and how it causes the aggregate demand to shift.

2) Similarly for the supply side, you need to explain one of the reasons why some may prefer to use supply-side policies.

3) Provide one example of a supply-side policy and explain why and how it causes the aggregate supply to shift.

In both cases, make certain that you are giving reasons supporting the use of these policies as opposed to giving reasons against the opposite policies.

1) Both supply-side and demand-side policies have impacts on inflation and unemployment. Explain what these impacts are for each type of policy (i.e. demand-side and supply-side policy).

2) Knowing these impacts and the reasons you explained above, which type of policy do you favor and why? Support your opinion with economic reasoning and concepts. If you use any other sources, be sure to cite them within the text as well as provide a bibliographical citation at the end.

Answer 1

Many economists usually focus on demand side policies and the reason for this is quite reasonable. Demand for anything depends on many this and it changes with the change in the taste and preference. Demand side is more sensitive than supply side. Supply is in long run is always considered as stable ( vertical line) which mean that whatever change occur in short run wont have any effect in long run if it is a supply side policy. So, policy maker usually focus on the demand side.

An example of demand side policy is FISCAL Policy. This is called a demand side policy as the government regulates the economy through expenditure and taxation. Suppose the government increase the taxes then the disposable income of common crowd will decrease hence the aggregate demand would decrease shifting it to left side.

An example of supply side can be MONETARY policy. Over her when the base rate is decreased then the supply of the money in the market increases thereby increase the supply and the aggregate supply curve moves rightward.

Both supply-side and demand-side policies have impacts on inflation and unemployment. Suppose the interest rate decrease and the supply of money increase hence the inflation will increase and as inflation increases the unemployment rate decreases (Philip’s law). Whereas the lower taxation improves the disposable income and increase the investment indirectly