Question

Please sort the five arguments below, according to whether they are used by advocates of the government spending approach or the tax cut approach to fighting recessions. Government Spending Approach Tax Cut Approach Consumers usually save part of their income, while the government spends it all. To be effective, tax cuts must be seen as permanent, rather than temporary. Allows consumers, not politicians, to decide Government spending will what goods and services are produced.result in higher taxes later. If targeted correctly, aggregate supply increases as well as aggregate demand.

pls explain carefully.

Answer 1

(1) Government spending approach:

- Consumers save part of their income while government spends it all

(therefore, overall increase in GDP is much higher when government spending rises compared to when tax is cut)

- To be effective, tax cuts must be seen as permanent.

(otherwise, consumers will not respond to a temporary tax cut and increase consumption spending since they know their future income will fall)

(2) Tax Cut approach:

- Allows consumers to decide what goods and services are produced

- Government spending will result in higher taxes later.

(current increase in government spending will increase budget deficit in current period and government will lower budget deficit by increasing taxes in future)

- If targeted correctly, aggregate supply increases as well as aggregate demand

(a personal income tax cut increases consumption, raising aggregate demand. A business tax cut increases business profitability, so firms increase output, raising aggregate supply).