“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. ]