macroeconomics question
explain whether this combination makes sense
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macroeconomics question
explain whether this combination makes sense
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Answers (1)
No, not this combination in islation.
JObs are created if spending increases. As spending increases, demand increases, hence firms can hire more workers to produce the extra needed, employment rises.
Government spedning is a source/component of aggregate demand. SImply cutting government spending decreases demand, and would tend to decrease emploment.
Only if the decrease in goverment spending is accompanies by a decrease in taxes or something would emploment have any chance of increasing. But even that is not given.
Say the amount of decrease in government spending is matched by an equivalent decrease in say income taxes. Then the amount the government is not spending is now in the hands on consmers. But consumers save part of their income, hence the amount they spend of this 'tax decrease' is less than the 'tax decrease'. Overall aggregate demand falls, hence employment is not boosted.
So for this to work, the amount of decrease in taxes should be greater than the cut in government spending; and if the reason for the cut in government spending was due to government deficits, this policy would just increase the deficit.