Question

• Compare and contrast the use of government spending changes versus tax changes as a means of influencing the course of the economy. Is one or the other preferable in specific situations?

Answer 1

Comparison between Government spending & government taxes.

1.An Increase in govt. spending is likely to cause a rise in aggregate demand which leads to a higher growth in short term.An increase in govt. spending increase the demand for goods & services which leads to an increase in output & employment.
whereas increase in taxation on goods,income & wealth influence economic behaviour.for example:-higher taxes on carbon emission will increase cost of producers which reduce the demand or shift of demand to alternatives.

2.A decrease in govt. spending leads to decrease in aggregate demand make economic growth down.

On the other hand,a decrease in govt. taxes increase the income after tax of people which leads to increase in spending of their on goods & services that tends to an increase in economic growth.

so as discussed above both government spending or government taxes have their positive & negative impact on economy.Now we are talking about preference of both in some situations.

When inflation is too strong.Government can increase taxes to control the supply of money in the economy.When there is a need to curbed the economy govt. use to increase the taxes.

On the contrary,in a situation of recession where people do not have enough to spend on goods & services government increase its spendings by the way of pension or subsidies to stabalise the economy.So that people can spend on goods & services.

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