Macro8C Essay Example | Topics and Well Written Essays - 1250 words

Macro8C - Essay Example In order to close this gap, the governments needs to take some expansionary fiscal policy i.e. increase government spending and/or reduce taxes. If only government spending is to be considered, At the end of your presentation, the president decides that any change in government expenditures would be politically unpopular at the moment, so she asks you how she might solve the same problem with a tax change instead. What change in taxation will you recommend? Be specific and show all of your work. Since there is a recessionary gap, the government would need to reduce the taxes. An increase in tax would mean lesser income available to spend. As the goal is to increase aggregate demand, taxes would need to be reduced. Cutting taxes will increase disposable income, which will stimulate consumption with multiplier effects & expanding output and employment. This implies that taxes need to be reduced by an amount of $ 500 in order to close the recessionary gap. So, it takes a larger deficit to get the same stimulus with a tax cut than it would with increased government spending. Suppose that a balanced budget amendment forces the president to match each dollar increase in government spending with an equal offsetting dollar increase in taxation, and each dollar decrease in federal spending with an equal decrease in taxes. Would fiscal policy be weakened, or even rendered useless, by such a law? Why or why not? The fiscal policy is not rendered useless as there is still change in GDP. If we look at the overall effect, the balanced budget multiplier allows us to close the gap without an increased deficit or decreased surplus. If, however, the recessionary gap to be closed is large, it would imply that the government needs to increase spending by a large amount, and also increase taxes by an equally large amount. This may not be very popular with the people and the government may be reluctant to enforce such a measure due to political