Question

Recent economic policy involved large increases in government spending, how is this supposed to impact the economy? Give an alternative policy to accomplish the same goal. Which is better? Why?

Answer 1

When there is an increase in the government spending it is supposed to increase the aggregate demand in the economy and there by increase the real GDP of the country. When the government spends in the economy that will increase the income of the people so when the income of the people increase they will do more consumption and investment activities so this increases the aggregate demand. The aggregate demand will increase so the real GDP and price level. The unemployment rate will decline and standard of living will increase.

The alternative of government spending is the cut in taxes, the cut in the taxes less effective than than the government spending this is because when the government cuts the taxes the disposable income will increase and the people will not consume the amount that is equal to the tax cuts and they save some part of it sp this is a leakage. So the increase in the aggregate demand will be less than the government spending. So the increase in the government spending is more effective than the cut in taxes.