Question

When the economy is in recession, government revenue falls due to a falling tax base. Therefore the proper role of government should be to increase taxes and cut spending so as to balance the Federal budget. Do you agree? Why?

“Money not backed by gold or silver is worthless paper and is a fraud committed against the people of the United States.” Critically evaluate this statement.

Answer 1

1)

When economy is in recession, there will be fall in economic activities, so the tax collections of government is bound to fall. Government intervention is required to correct disequilibrium in economy. Economy must be provided with further fall in taxes and rise in expenditure. there will be increase in government deficit further. It is right policy course of action. But if government goes with policy measures of increasing taxes and reducing expenditure, economy will further suffer the bout of recession or recession will further deepen.

Thus, we are not agree with statement that government must raise the level of taxes.

2)

Since money is not backed by the gold and silvers, thus money does not have any intrinsic value. If economic system fails, paper currency would have no value or it will turn into scrap.

Due to lack of gold and silver availability coupled with rising level of GDP, it was incumbent on part of government, to invent new form of money.

It is called fiat money. it is backed by the sovereign power of government. People have developed trust on government, So money is accepted as medium of exchange and store of value. Hence, it would not be correct to say that money not backed by the gold or silver is fraud committed against the people of the united states.