1. Which has a larger effect on aggregate demand: an in

Added on - 21 Sep 2019

  • 5

    pages

  • 1381

    words

  • 151

    views

  • 0

    downloads

Showing pages 1 to 2 of 5 pages
1. Which has a larger effect on aggregate demand: an increase in government expenditureor an equal-sized decrease in taxes? Explain your answer.The aggregate demand gets impacted greater through the increment in the governmentexpenditure. Aggregate demand refers to the final demand that incurs within the countryregarding products and services for a particular time frame (Friedman & Heller, 1969). It alsorefers to the overall products and services that are purchased within an economy at various pricepoints.The aggregate refers to the effective demand and is denoted by the below given formula:Y = C + Ip + G + (X - M)The investments made by the government and the consumption expenditures (G), can becalculated using “G-T” which refers as the difference among the expenditures made by thegovernment and the collected tax (Persson & Tabellini, 1994). If the expenses of the governmentincreases or there is any kind of reductions in tax, then the increment in the Gross DomesticProduct can be evident reasoning that the expenditures of the government is the major part of theoverall or aggregate demand in an economy.As per the Keynesian theory, if the employment is increased by the government using the publicactivities and considers the increment in the interest rates, then the investments in other areas canbe compromised (Shaw, 1972). It should not be pointed towards crowding out. There is a beliefamong Keynesian theorists that in adverse situations, the increased expenses by the governmentincreases the overall output (which comes as larger than original increased spending)
2. To eliminate a recessionary gap, which fiscal policy should the government pursue? Bespecific.The consideration of expansionary fiscal policy is the suggested mode for the elimination ofrecessionary gaps. The expansionary policies have been largely preferred by the governmentswhenever the economies have faced recessions. The focus in this policy has been on increasingthe expenditures of the government along with reducing the taxes (Persson & Tabellini, 1994).The recessionary gap can be identified as the outcome of recession. This can be of theconsideration that the overall or aggregate demand (GDP) is below than where it could havebeen in case there was complete employment. The consideration to reduce the gap will lead tothe government towards increasing the expenditure which has direct impact on the overall oraggregate demand curve. The reason is that the expenditures of the government are likely toincrease the demand for the goods and services. Moreover, the consideration of reduction in thetaxes is generally expected to positively impact the demand curve through increased productivityof the consumers (Persson & Tabellini, 1994).The expansionary policy impacts the demand curve and shifts it to the right. This eventuallyimpacts the recessionary gap in a negative manner and closes the gap which in turn aid ingrowing and developing the economy.3. The online text discusses fiscal policy in action. Keynesian economics is a school ofthought that believes fiscal policy is needed to stabilize the fluctuations in the real GDP.Classical economists such as Adam Smith believe that the economy is most efficient withoutgovernment intervention. Suppose you are an advisor to a presidential candidate. Which
desklib-logo
You’re reading a preview
card-image

To View Complete Document

Become a Desklib Library Member.
Subscribe to our plans

Download This Document