Question

1. If inflation is a major issue in the economy, what would be the correct fiscal policy response from an economic perspective? Why would members of Congress be unlikely to support such actions?

  

  2.   Why is the tax multiplier smaller than the government spending multiplier?

Note :- Please avoid Plagiarism( not copy paste from other post)

Answer 1

1. Inflation is the gradual rise in the prices of goods and services in an economy. Too much inflation is not good for any economy. To gain control over inflation, the government needs to lower the supply of money that the consumers have with them. They have to take away some purchasing power from the consumer. A fiscal measure to do the same can be an increase in the taxes that the government charges from individuals. This would lead to a decline in the disposable income of the consumers and would hence lead to a fall in demand for goods. A fall in demand, with supply of the goods remaining constant, would lead to a fall in prices and hence correction of inflation. Congress might not want to make this move forward as a rise in taxes can prove to be unfavorable from a political perspective, and can harm the vote bank of the government.
2. Tax multiplier is always smaller than government multiplier as there are various sources through which government earns revenues and hence spends in the future, and taxes are only one component of those revenues. Various other sources of revenues are fees and fine, revenue from public sector industries etc.