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just a discussion question economics

“Fiscal Policy” Please respond to the following:

  • Which fiscal policy measure is more likely to have a greater impact on the economy when unemployment is rising and consumer confidence is falling – an increase in government spending or an equal decrease in taxes? Explain your reasoning.

Optional:  Assuming, in a simple economy with no net exports,  the marginal propensity to consume (MPC)  is 0.8. This would generate a government spending multiplier of 5.0  and a tax multiplier of -4.0 .  If government spending increased by $100 million, what would the impact be on total spending in the economy?  If instead, taxes were reduced by the same amount,  $100 million, what would the impact be on total spending in the economy?  Could the government run a balanced budget (increasing government spending and taxes by the same amount) and still grow the economy?  

[Note:  Government Spending Multiplier is 1/(1-MPC)  and Tax Spending Multiplier is – MPC /(1-MPC) .   The tax spending multiplier is negative because an increase in taxes would cause spending to fall while a decrease in taxes would cause spending to rise. ] 

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