Question

1) Tax cut causes recession and raising taxes can help the country recover. Do you agree or disagree with this statement? Explain why.

2) What are the reasons why a government should run huge deficits?

3) Where are US government going to get the money to pay for all the debt?

4) The US government currently has no enough saving to finance these deficits. How bad it could be if they do nothing?

Answer 1

1. Tax cut increases Savings and investment hence cause increase in economic cycle whereas taxes do yhe opposite effect henc the statement made is incorrect.

2. Government should run in deficit so as government spending spur growth and this creates employment with that employment there is increase in consumer spending leading to higher government revenues in the form of taxes so it is a cycle and hence as long as government can serve its debt comfortably they tend to run on deficit so as to increase growth

3. As mentioned above it is acycle as economy grows so does the income and consumption leading to higher tac collection for the government untill the interest rate are reasonable on debt government should be able to pay higher debt service amounts through its revenues(tax collection etc.)

4. Government can borrow to finance the deficit but if it is not controlled government will not be able to service it's debt ibligation leading to drastic devaluation of the currency,ratng downgrades, and has to take help from other multilateral agengy for bail out