Question

Note that the tendency to spend more than is raised in revenue is certainly not limited to Donald Trump. As an example, in fiscal year 2016 (i.e. before Trump took office) the federal deficit (the amount the government spent beyond what it took in as tax revenue) was $587 billion and the gross federal debt (the total amount of outstanding debt that current and future generations of taxpayers are on the hook for) is $19.5 trillion. Thus, the “spend more than we bring in” tendency in Washington has a long history. In many other countries (Venezuela for example) this short term perspective on the part of politicians is even more pronounced. a. Explain why we should not be surprised to see Donald Trump proposing such dramatic tax cuts without commensurate spending cuts. b. Explain why government in these United States works so well...compared to many other places around the world. Use graphs to answer these questions.

Answer 1

Solution A

Taxcuts are more of fiscal expansion policy and coupled with automatic stabilizer this bribgs economy with surplus cash and boosts disposable incomes and hence aggregate demand and real GDP both increases. This certainly raises prices but brings economic prosperity .

Solution B

US is very successful because of combination of fiscal and monetary policy by government and Fed respectively. The program like Quantitative easing has worked well. Secondly deals lije G20 and NAFTA work superbly for Americans. Also crude oil and gold is traded in dollars which make US Economy very strong and dollars are in demand.

Graph for expansionary fiscal policy is below.