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7. Explain why a given amount of government expenditure (G) will yield more fiscal stimulus than...

7. Explain why a given amount of government expenditure (G) will yield more fiscal stimulus than an equivalent amount of tax cuts.

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Answer #1

Expansionary fiscal policy aim is to increase the production activities in the economy. Therefore government either increases government expenditure or decreases taxes.

Contractionary fiscal policy aim is to decrease the production activities in the economy. Therefore government either decreases government expenditure or increases taxes.

Spending multiplier=1/MPS

tax multiplier= -MPC/MPS

Therefore the value of the spending multiplier is always greater than the tax multiplier. This is the reason why a given amount of government expenditure (G) will yield more fiscal stimulus than an equivalent amount of tax cuts.

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