Compare and contrast the use of government spending changes versus tax changes as a means of...

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Economics

Compare and contrast the use of government spending changesversus tax changes as a means of influencing the course of theeconomy. Is one or the other preferable in specific situations?Imagine for a moment that you have two roommates, who each haveopposing viewpoints on nearly everything, including politics andeconomics. Taylor is adamant that the best way to manage theeconomy is through tax changes, while Morgan insists that itâ€™sbetter to adjust the economy through government spending. Whatwould a Neoclassical economist say? What would a Keynesianeconomist say?

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Argument for tax changes neo classical Neoclassicals generally believe in low tax and limited government expenditure for economic growth and price stability According to them tax cut would increase disposable income and thus aggregate demand through personal income tax cut and also in corporate tax cut If tax is cut on business profits after tax productivity of the capital stock rises according to neoclassicals Businesses can create more capitals until the marginal product of capital falls back to the long run See Answer

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