Question

A recent New York Times article stated: "Recent debates in the House considered Trump tax cuts and tax rebates similar to those enacted during President Bush's administration.....With the unemployment rate going down and the wars in Afghanistan and Iraq finally over, it would most unwise not to seriously consider tax cuts and tax rebates to help consumers and businesses.....Although this will significantly reduce tax receipts and increase the Federal deficit, the Federal Government should borrow money and continue its deficit fiscal policy to increase spending for the Affordable Care Act (Obamacare), economic stimulus, Medicare, Social Security, and other programs. A deficit is a small price to pay for economic stability." Using the fiscal policy tools briefly explain what the New York Times means by this statement.

Answer 1

The two main fiscal policy tools used by the government to stabilize the economy are as follows:

1. Change in government expenditure

2. Change in the tax rate

In the above case, it is stated that the government should undertake expansionary fiscal policy in order to maintain stability in the economy. This involves increase in government expenditure and reduction in tax rate. This will increase aggregate expenditure in the economy which will ultimately increase aggregate demand and increase the level of national output or real GDP in the economy.Thus, the statement emphasizes on following expansionary fiscal policy of the government.