What Would You Do? If the current GDP had declined or expanded over the past 2 q
ID: 1137785 • Letter: W
Question
What Would You Do?
If the current GDP had declined or expanded over the past 2 quarters at least, which of the tools of fiscal policy would you use to try to rein in the economy and how is this tool expected to affect Aggregate Demand?
If you were in charge of making changes to U.S. fiscal policy, what changes would you make given the current economic conditions?
Tax Cuts
Do you believe that tax cuts are vital to help revive an economy in recession?
Would a one-time tax cut or a permanent tax cut work better in the short run?
Would a one-time tax cut or a permanent tax cut work better in the long run?
If the US has been on a "consumption binge" for the past few years, would further tax cuts be helpful?
Explanation / Answer
If economy had declined over the past 2 quarters. it suggests that aggregate demand of economy has declined, there must be sufficient economic stimulus to restore previous equilibrium in national income. here, government has two options; tax and expenditure.
In order to expand aggregate demand, government must increase its expenditure and reduce taxes. These policies measures would have positive impacts on Aggregate demand.
Tax cut can play important role in reviving economy in recession, but it may play complementary role to expenditure policies of government. Tax cut is not as much effective as the expenditure by government.
In short run, one time tax may prove beneficial. it will increase income of people, they would tend to increase their expenditures or consumption thereby leading to rise in aggregate demand.
In long run, people take consumption decisions based on anticipated income over the long run, thus permanent tax cut would be beneficial in long run. one time tax cut would not incentivise people to make more consumption expenditure.
US consumption level is already high, more tax cut may not be good for economy, it will reduce government tax revenue which would not be favorable over the long run.
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