Question

Which would have a larger influence on aggregate demand- increase in government spending or decrease in taxes? Why is this?

Answer 1

The deflationary situation in the economy removed through expansionary monetary and fiscal policy. Under expansionary methods of fiscal policy increasing government expenditure and reducing taxation will increase the aggregate demand in the economy and solve the deflation problem in the economy.

The effect of government expenditures on economic activities more powerful than the reducing the taxation rate. Because reducing the taxation will not produce desirable effects, for example, higher income groups save more by reducing taxation rate and not spending on consumption of goods and service.

On the other hand, increasing the government expenditure has more desirable effects examples it encourages public investment and government investment resulting in the production of goods and service, employment income and output reduce deflationary situation in the economy.