Explain Why Tax Revenue Changes When the Economy Goes Into a Recession.
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- Category: Politics: Economics
- Date Submitted: 09/23/2013 03:22 PM
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A. Explain why tax revenue changes when the economy goes into a recession.
Tax revenue will most certainly decline during a recession. Although there are many contributing factors for government revenue, a substantial amount of it comes in the form of tax receipts. And when real GDP growth is negative for continual quarters within a year, it’s going to have an immediate effect on household taxable income. Lower disposable income, will lead to lower consumer spending, which will then lead to a fall in real GDP. A decrease in income will cause tax revenue to decline.
B. Explain why government spending changes when the economy goes into a recession.
As stated earlier when an economy goes into recession it’s primarily associated with lower household disposable income, which will lead to lower consumer spending, and ultimately a fall in real GDP. To stimulate the economy, sometimes expansionary fiscal policy is implemented to push aggregate demand cure to the right, this is done by increasing government spending, causing income to be based on the multiplier effect. For example if the government decides to spend $10 billion to expand the 405 freeway, this will directly increase goods, and services by $10 Billion, but it doesn’t stop there, there will also be an indirect effect on the economy, because the governments purchase will start a chain reaction within the economy. The firm hired to expand the 405 freeway will then purchase goods, and services, and in return this will increase disposable income, which will lead to a rise in consumer spending, and ultimately an increase of real GDP.
C. If the government were to operate under a strict balanced-budget rule, what would it have to do in a recession? Would that make the recession more or less severe?
For the government to operate under a strict balanced budget rule
Tax revenue will most certainly decline during a recession. Although there are many contributing factors for government revenue, a substantial amount of it comes in the form of tax receipts. And when real GDP growth is negative for continual quarters within a year, it’s going to have an immediate effect on household taxable income. Lower disposable income, will lead to lower consumer spending, which will then lead to a fall in real GDP. A decrease in income will cause tax revenue to decline.
B. Explain why government spending changes when the economy goes into a recession.
As stated earlier when an economy goes into recession it’s primarily associated with lower household disposable income, which will lead to lower consumer spending, and ultimately a fall in real GDP. To stimulate the economy, sometimes expansionary fiscal policy is implemented to push aggregate demand cure to the right, this is done by increasing government spending, causing income to be based on the multiplier effect. For example if the government decides to spend $10 billion to expand the 405 freeway, this will directly increase goods, and services by $10 Billion, but it doesn’t stop there, there will also be an indirect effect on the economy, because the governments purchase will start a chain reaction within the economy. The firm hired to expand the 405 freeway will then purchase goods, and services, and in return this will increase disposable income, which will lead to a rise in consumer spending, and ultimately an increase of real GDP.
C. If the government were to operate under a strict balanced-budget rule, what would it have to do in a recession? Would that make the recession more or less severe?
For the government to operate under a strict balanced budget rule