Question

Here is major macro economic indicators of the economy from 2009 to 2016. 2009 2016 43% -0.2% Real GDP growth rate Unemployment rate inflation Tax revenues (% of GDP) National Debt to GDP ratio 10% 1.2% 19% 127% 23% -0.8% 27% 180% Government spending over that past decade has remained stable around 20% of GDP. Which of the following policies do you think is best for reversing the current situation? Consider the implications on economic activities of all choices and form a detailed response as to why you chose one of them A. Increase taxation but keep government spending stable. B. Increase taxation and at the same time increase government spending through the increase in public sector jobs. C. Introduce tax cuts for employers that hire workers. D. Decrease taxation on low and middle income households and increase government spending. E. Decrease taxation on high income households and keep government spending stable.

Answer 1

By looking at real GDP growth rate of the economy in 2009, we can conclude that the economy experienced a shock in 2009 and it is somehow reviving mostly by borrowing from foreign countries as debt to GDP ratio has increased in 2016. Inflation below 0 (-0.8%) indicates that consumers have reduced their spendings accompanied with reduced money supply and rising unemployment rates in the economy. Government spending is stable around 20% of GDP despite the increase in tax revenues.

So, let's discuss what government should/should not do to reverse this scenario :

A. By increasing taxation, government is decling the retail sales further as consumers are already spending very low. So this policy of increasing taxation and constant government supply will only increase inflation and hence not helpful.

B. We know increasing taxation is not the solution when it is clearly inceasing in terms of revenues but increase in government spending might help to create new jobs but these two things together (or this policy ) will not help.

C. Tax cuts for employers that hire workers will definitely increase job creation at some extant but that will not increase money supply in market. Also consumer spending will not boost with the amount it needed to increase. So this policy will not be helpful.

D. By decreasing taxation on low and middle income households will defnitely provide them power to spend some extra amount ( amount that is saved after paying low tax) and hence will increase money supply with increasing retail sales. Increasing government spending on other hand will create jobs and hence unemployment rate will decrease . This policy will work perfectly in this scenario.

E. Decreasing taxation on high income household will not do a thing as their spendings will remain same in both the cases ( more or less taxation ) and hence will not increase money supply. On other hand stable government spendings will be unable to create jobs and hence no decrease in unemployement rate. So this policy will not work in this scenario.