Question

1. What should be the role of government in the economy? (You may feel it should be less, more, or it could be just about right). Defend your position with a compelling economic argument.
2. Does government fiscal policy work (taxes, spending)? Why or why not?
3. Are there any fiscal policies (taxes, spending) that you support? Why or why not?
4. Thinking about supply & demand, is government intervention required to close the recessionary gap or the inflationary gap? Why or why not?

Answer 1

The extent to which a government should intervene in an economy has been debated over the years. Few argue that the role of the government should be limited whereas few believe that there is a need for the government to actively intervene in the economic activities. Ideally, the government's role in an economy should be to aid it's growth and bring stability. The government should play an active role in an economy by regulating the business cycles and implementing policies which bring stability and growth to the economy. The need for government intervention differs based on the aspect, for instance, in areas like defense, there is a need for active intervention but when it comes to intervention in markets, it need to be just right. The government should be ready to step in when there are market failures or recessionary trends.

Fiscal policy basically refers to government's spending and tax policies. It is very effective especially when an economy is in recession. In such times, the monetary policy is not very effective in boosting the demand and bringing the economy out of recession. It is a very effective tool in managing the economy and helps affect the output of the nation.

According to me, taxes that the government imposes are very effective. They aid in removing the inequalities in the economy. For instance, wealth tax is a tax that is imposed on the net wealth of individuals. Because of the imposition of the wealth tax, the rich who own a lot of wealth will pay tax on their assets. This will increase the revenue of the government and this increased revenue can be used for spending on public goods which will remove inequalities in the economy.

The government intervention becomes very crucial when the economy is experiencing recessionary or inflationary gaps. When the economy is in an inflationary gap, the government would reduce spending and increase taxes. This will lead to a decrease in the demand for goods and services as people's income is reduced and a decreased supply as producers would not be willing to produce more when the taxes are high. Similarly, when the economy is in a recessionary gap, the government will increase spending which will boost demand as incomes rise. Along with this, taxes will be reduced, which will reduce the cost of producing and encourage production, thereby leading to an increase in supply. As supply increases, employment and incomes increase further bringing the economy out of the recessionary gap. Government intervention can help bring the economy out of recessionary or inflationary gaps.