Deck 19: Debates in Macroeconomics Over the Role and Effects of Government

Question 1

Whether an economist argues in favor of a rise in government spending or a cut in taxes (as an expansionary fiscal policy measure) could have something to do with whether she views the government spending multiplier as greater or less than the tax multiplier. Do you agree or disagree? Explain your answer.

Answer 1

Here, if the economy is in recession, the government calls for an expansionary fiscal policy measure. This means that the government increases either its spending or cut taxes or both. By doing this, government will increase the demand in the economy and increase income.
The government budget multiplier determines changing the government spending, income of the economy. Thus, government budget multiplier is the number that, multiplied by the changes in government spending gives the change in total spending and real GDP.
Changing the taxes, total spending of the economy is determined by the tax multiplier. Thus, tax multiplier is the number that, multiplied by the changes in taxes gives the change in total spending and real GDP.
Now, if the economy is in recessionary gap and the government has to increase total spending, it will opt for the bigger multiplier. If the government budget multiplier is greater than the tax multiplier, it will increase its spending to move the economy as fast as possible from the recession.
There is much debate about the magnitude of tax multiplier and government multiplier. Then, the economists who saw the government budget multiplier as greater than the tax multiplier, would opt for a raise in government spending than cut in taxes.
Thus, whether she argues in favor of raise in government spending or cut in taxes depends on whether she views the government spending multiplier is greater than or less than the tax multiplier.

Question 2

Whether an economist argues in favor of a rise in government spending or a cut in taxes (as an expansionary fiscal policy measure) could have something to do with how he views the current size and scope of government in relationship to his optimal size and scope of government. Do you agree or disagree? Explain your answer.

Answer 2

Economist's opinions in favor of a rise in government spending or a cut in taxes are largely related to the size and scope of the Government.
The size of the government relates to the resources over which Government has command and the scope of government relates to what Government does.
The decision between government spending and tax cut depends partly on the effect that each has on the size and scope of the government. A group of economists favors bigger government (Government making more decision); when it comes to advocating increased government purchases or tax cuts, this group of economists argues for increased government purchases. They see increased Government purchases as increasing the size and possibly the scope of Government.
Whereas, the other group favors smaller government (government making fewer decisions); when it comes to advocating increased government purchases or tax cuts, this group of economists argues for tax cuts as they sees cutting taxes as decreasing the size and possibly the scope of the Government.

Question 3

Whether an economist argues in favor of a rise in government spending (as an expansionary fiscal policy measure) could have something to do with the degree of crowding out he expects as a result of the measure. Do you agree or disagree? Explain your answer.

Answer 3

Here, know that the increase in government spending decreases the private spending thereby offsetting the increase in demand, this is called the crowding out. The crowding out often weakens the effect of expansionary fiscal policy measure.
Suppose that the economy is in recessionary gap, and the economists favor an increase in government spending is an expansionary policy measure. Then, every dollar that the government spends has to be borrowed from the private sector. Then, the private sector will have a lesser dollar to spend.
Hence, the private sector demand will fall by a dollar. Then, an increase in government spending will decrease the private spending and thus aggregate demand. This way a rise in government spending will not raise the aggregate demand enough to remove the economy from the recessionary gap.
This is why the economists often argue about the degree of crowding out while taking into account the increase in government spending as a policy measure.

Question 4

Some economists argue that if the economy currently needs to be stimulated to remove it from a recessionary gap, h o w government spends more money (on X or Y) matters less than the fact that it spends more money. Do all economises agree? If not, what do they say in response?

Question 5

Outline the details of the debate between economists who favor a rules-based monetary policy and those who favor a discretionary monetary policy.

Question 6

Something is referred to as a "double-edged sword" if it can have both favorable and unfavorable consequences. In what way might government bailouts of failing companies or financial institutions be a double-edged sword? Explain your answer.

Question 7

The shape of the aggregate supply curve matters co one's view of the ability of government to change Real GDP by way of demand-side fiscal policy and monetary policy. Do you agree or disagree? Explain your answer.

Question 8

What do the values of the government spending and tax multipliers have to do with "getting the biggest bang for the buck"?

Question 9

There is little doubt that if income tax rates are cut, the size of the budget deficit will increase. Do you agree or disagree? Explain your answer.

Question 10

Can tax revenue rise and the budget deficit decline as a result of an income tax rate cut? Explain your answer.

Question 11

A $40 reduction in taxes increases Real GDP by $100, and a $50 increase in government spending increases Real GDP by $120. What does the tax multiplier equal? What does the government spending multiplier equal?

Question 12

How an economist thinks the economy works-is it self-regulating or not-influences his opinion of the role government should play in trying to stabilize the economy. Do you agree or disagree? Explain your answer.

Question 13

A rise in aggregate demand raises Real GDP and the price level. Draw the aggregate supply curve consistent with these results. Next, a rise in aggregate demand raises the price level but leaves Real GDP unchanged. Draw the aggregate supply curve consistent with these results.