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?
Compare and contrast the use of government spending changes versus tax changes
Respond to the following prompt in a post with a minimum of 200 words, then comment on at least TWO 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? Find a news article to help support your opinion. Summarize the article and include the link to in your response.
Remember to cite your sources.
Fiscal policy is the use of government spending and taxation to influence the economy. Governments use fiscal policy to influence the level of aggregate demand in the economy in an effort to achieve the economic objectives of price stability, full employment, and economic growth.
The government has two levers when setting fiscal policy:
Firstly, change the level and composition of taxation, and/or
Secondly, change the level of spending in various sectors of the economy.
There are three main types of fiscal policy:
- Neutral: This type of policy is usually undertaken when an economy is in equilibrium. In this instance, government spending is fully funded by tax revenue, which has a neutral effect on the level of economic activity.
- Expansionary: This type of policy is usually undertake n during recessions to increase the level of economic activity. In this instance, the government spends more money than it collects in taxes.
- Contractionary: This type of policy is undertake n to pay down government debt and to cap inflation. In this case, government spending is lower than tax revenue.