Question

Fiscal Policy

Respond to the following prompt in a post with a minimum of 100 words, then comment on at least ONE other posts.

• 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? Imagine for a moment that you have two roommates, who each have opposing viewpoints on nearly everything, including politics and economics. Taylor is adamant that the best way to manage the economy is through tax changes, while Morgan insists that it’s better to adjust the economy through government spending. What would a Neoclassical economist say? What would a Keynesian economist say? Which roommate do you agree with, and why?

Answer 1

Change in taxes and expenditure are part of fiscal policy. Both of these are used by government to change the direction of economy. Tax and expenditure influence economy through multiplier process. Initiate tax cut or increase in expenditure cause multiple rise in income level. Thus, these could be used to restore equilibrium in economy which is stable and sustainable.

But multiplier values differ in both cases. Multiplier value of expenditure is larger than multiplier value of tax. Since round is completely missing in tax.

Tax multiplier = - MPC/1-MPC

Expenditure Multiplier = 1/1-MPC

Classical believes in minimum intervention of government in economic activities, so they recommends reduction in both taxes and expenditure.

Keynesian hold varied views about fiscal policy. They consider fiscal policy as most effective instrument to deal with economic fluctuations. they argue that expenditure is more effective than tax.

Thus, we would agree with Morgan.