Question

Explain an argument from the economists that do NOT support active fiscal policies (i.e. doing it something. ii) If the tax rates drops it could be the case that government revenue increases? (as some politicians claim it could be the case) iii) why it could be the case that an initial sharp increase in the budget deficit (as in the USA after the economic crisis) could drop thru time? iv) What do economist mean when they say that policy makers should start jump the economy ?

Answer 1

i) 1. Probability of high Human Error -: It may lead to negative consequences if the economists do not analyse the situation properly . There is a high probability of error in this discretionary policy .

ii) The tax rate drops could also lead to increase in govt revenue . This is the case because low tax rates means more money in the hands of people , further which is used for consumption and investment purpose . More work and investment would mean the people will earn more income and increased income increases the tax base for the govt . Hence the revenue can be increased if tax rate drops lead to an increase in the tax base.

iii) When an increase in government expenditure or a decrease in government revenue increases the budget deficit which results in inflation