In chapter 16 we learned about fiscal policy –the federal government’s tool kit

Question

In chapter 16 we learned about fiscal policy –the federal government’s tool kit for addressing business cycle fluctuations. In chapter 12 we learned that business cycle fluctuations are caused by changes in aggregate expenditure. One implication of this idea is that if we are in a recession, it is because total spending has decreased. Therefore, if we want to get out of a recession, total spending needs to increase. Chapter 16 offers two ways to stimulate total spending –through tax cuts or increases in government spending.

Typically, Republicans favor tax cuts, while democrats favor increases in government spending. There are economic rationales for both positions. Tax cuts put money into the pockets of consumers, who are better than the government at determining how resources should be allocated –this promotes “allocative efficiency” (from chapter 1). On the other hand, the tax multiplier is smaller than the government purchases multiplier (see section 16.4 in the text). This means that we get more economic stimulus from a given dollar value of government spending than the same dollar value in tax cuts.

The tradeoff here is between more efficiency (with tax cuts) vs. more economic stimulus (with government spending).  Differences of opinion on this matter are cause for heated political debate and overblown political rhetoric.

So what do you think? Do you prefer economic stimulus from tax cuts or increases in government expenditure?

Explanation / Answer

During recession ,there is a lot of idle or unutilised productive capicity, that is available machines and factories are not working to their full capacity, as result ,unemployment of labour increases along with the existenceof excess capital stock.

Although both methods are very important for controling recession.Tax cut increase purchasing power of the household sector,which increase the aggregate demand of the economy.which increase the production,employbility, but it does not increase the rapid industrialisation.

But Government spending inrease development of infrastructure both economic infrastructure aswellas social infrastructure.which lead rapid industrialisation--production-employbility--income --demand etc.

In 1930 in England-Prof.Kense use Multiplier Theory of Govt. spending for controling great recession situation.

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