Question

It is difficult to implement both of these policies at the same time because reducing taxes on private spending has the effect of increasing the government budget deficit.
a. True
b. False

Answer 1

It’s true that implementing both of them at the same time would be difficult because lowering taxes on personal purchases results in a bigger government budget.

Investment can rise through lowering taxes on individual savings or by reducing the public debt. However, unless other taxes are raised or government spending is decreased, lowering taxes on private savings has the consequence of widening the government budget deficit. Therefore, it's challenging to participate in both at once.

Growth in aggregate demand is probably going to result from increased government spending (AD). In the short run, this may result in greater growth.

Depending on which area of government spending is increased, higher government spending will also affect the supply-side of the economy. Spending directed toward infrastructure development may boost productivity and expand the long-term aggregate supply.

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