STIMULUS V AUSTERITY Case Solution
During the crisis of 2008, many economies have fluctuated all over the world at a wide spread scale. Later after the end of the crisis, the governing authorities of various economies have made various strategies in order to bounce back from the recession. Thus, in order to bounce back from the recession, many economies have made strict fiscal and monetary policies in order to stabilize the economies, whereas, some of them have adopted loose fiscal and monetary policies in order to boost the overall economic growth of the company.
The main topic of this debate is that should the government use austerity measures i.e. tight monetary and fiscal policies or should the government use flexible economic and regulatory policies in order to boost up the overall economic growth of the country. (The Economist, 2013)
If the Government opts for tax cuts, then it would increase the overall purchasing power of the company. Increase in purchasing power would enhance the overall demand of the commodities in the economy. Thus, increase in demand would increase the overall inflation in the economy, which would subsequently enhance the overall employment in the economy, according to Philips curve.
If the Government opts for high tax, then it would decrease the overall purchasing power of the company. Decrease in purchasing power would certainly decrease the overall demand of the commodities in the economy. Thus, decrease in demand would decrease the overall inflation in the economy, which would subsequently enhance the overall employment in the economy, according to Philips curve.
Thus, in order to boost the economy in afavourable manner, the Government of such economy should opt for tax cuts as it would enhance the overall employment level of the economy, which would subsequently enhance the overall economic growth of the country.
In addition to this, if the Government injects money in the economy in order to enhance the overall growth of the company, then it would only be favourable in the short term, as it would result in devaluation of the currency as well as it would enhance the overall level of inflation of the country. Thus, economic growth would be compromised in the long term................
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