Imagine you are a congressman trying to decide which of the two options to vote for. An economist asked to testify before Congress is explaining that based on a recent study, to increase economic growth from 2% to 4%, major increases in government spending, or major tax cuts need to be passed by Congress soon. The economist explains two alternative options to boost economic growth at the desired level:
Option 1: Increase government spending on infrastructure by $20 billion.
Option 2: Lower business/corporate taxes by the same amount, $20 billion.
Part I How does each option affect the government budget? Explain how would each option change the amount of the existing budget deficit.
Part II Which of these two options will likely have the largest impact on the growth rate of RGDP? Explain your answer by focusing primarily on the concepts of government spending multiplier, GM, and tax multiplier, TM. Which option do you think the economist would recommend? Based on the comparative analysis done by the economist, if you were indeed a congressman, which option would you vote for and why? Recall these formulas: Change in RGDP = GM * Change in G GM = 1/(1 – MPC) Change in RGDP = TM * Change in T TM = -MPC/(1-MPC)
Part III Would the answer to the last question above change if, as a congressman, you were very interested in getting reelected, and if: a. A powerful lobby group representing a large corporation strongly favors a significant corporate tax cut in their specific industry. State if your answer would change in this scenario, and explain why. Type your answer below .... b. All businesses, from sole proprietorships and partnerships, to medium size businesses and large corporations would greatly benefit from a proportional business tax cut. State if your answer would change in this scenario, and explain why.