Question

1. Based on the known economic facts and with the support of these facts, which do you think is more effective as a fiscal policy tool: Taxes or Government spending?
2. In general, which policy driver do you think is more effective fiscal policy or monetary policy? Support your choice with credible economic points and facts.
3. Relying on the understanding of what you learnt about international trade and finance from the textbook and other credible sources, what position will you take concerning the on-going trade (tariff) war with China and other nations by the US government. You must use facts to support your position, and refrain from unnecessary politics, just focus on economics.

Answer 1

Both tax and expenditure or government spending are parts of fiscal policy. But the tax multiplier is less than the multiplier of expenditure. Thus, government spending is more effective in generating extra income in the economy.

Usually, both monetary and fiscal policies are used by the government to correct disequilibrium in the economy. But Keynesian economists believe that the problem of the liquidity trap makes the monetary policy ineffective in dealing with economic fluctuations. Thus fiscal policy is effective in restoring equilibrium if the economy monetary policy does not work. Thus, fiscal policy is more effective.

Free trade is beneficial to all parties. But here the US and China are in a fierce trade war. Both countries are imposing tariffs on the flow of goods and services. it has reduced the volume of trade. Now consumers are liable to pay the higher price and the cost of production is also likely to shoot up. thus trade war is not beneficial or it might provide some benefits over the short run but over the long run, benefits will wither away.

China is keeping its currency artificially low, it is hurting US economy. China needs to avoid the such unethical practices and follow the appropriate trade policies.