Question

President-elect Donald Trump’s race to enact the biggest tax cuts since the 1980s went under a caution flag Monday as Senate Majority Leader Mitch McConnell warned he considers current levels of U.S. debt “dangerous”. The Committee for a Responsible Federal Budget, a nonpartisan think tank, has projected that Trump’s plans would increase the debt by $5.3 trillion over a decade, with deficits already over $600 billion a year and rising on autopilot.

1) In 3 sentences or less, use the knowledge you acquired in this course to explain why Trump may consider that the tax cuts will have a positive impact on the US economy.

2) In 3 sentences or less, explain why Senate Majority Leader McConnel is concerned about the impact that rising debt may have on the US economy (hint: think about the market for loanable funds)

Answer 1

Q1) Tax cuts will make it profitable for the firms to make new investments. This will lead to an increase in investment and long term economic growth. It will also spur consumer spending as the disposable income of the people will be higher after the tax cut.

Q2) A very large debt can lead to higher interest rates if the creditors worry about the repayment of debt. In the market for loanable funds, demand will increase which raises interest rates as limited savings chase more investment demand. This can be harmful for long term capital floes and growth in the country.