Question

Compare and contrast the use of government spending changes versus tax changes as a means of influencing the course of the economy. Is one or the other preferable in specific situations? Imagine for a moment that you have two roommates, who each have opposing viewpoints on nearly everything, including politics and economics. Taylor is adamant that the best way to manage the economy is through tax changes, while Morgan insists that it’s better to adjust the economy through government spending. What would a Neoclassical economist say? What would a Keynesian economist say? Which roommate do you agree with, and why? .

Answer 1

Government seeks to correct disequilibrium in economy through the change in fiscal policy. Expenditure and tax are tools of fiscal policy. Government can change expenditure and tax to influence direction of economy. Change in tax and expenditure affect the economy multiple times. it is called multiplier effect. But multiplier effects differ in both tools. Usually, Expenditure multiplier is larger than tax multiplier. Thus, expenditure would be more effective to cure recession or depression. Thus, most of economists argue that government must follow expenditure route to correct economic fluctuations.

Thus, if we go with aforementioned reasoning, then Morgan would be right to larger extent.

Keynesian economists argue that government must go with expenditure policy, it would be most effective tool to correct recession or depression. While. neo classical contend that government must make minimum intervention in economic activities. Market system is most efficient medium and it automatically, correct the deformities or fluctuations in economy.