Answer to Question #269894 in Macroeconomics for Harleen

Question

When the economy was slowly recovering from recession, in 2011, the NDP called for government spending on infrastructure and green energy and said that corporate tax cuts did not give sufficient stimulus.

i. Was the NDP’s proposed infrastructure spending a fiscal stimulus? Would such spending be a discretionary or an automatic fiscal policy?

ii. Explain whether, and if so how, spending on infrastructure and green energy would create jobs. Use graphs to illustrate your answer.

iii. What would have a larger effect on aggregate demand: Corporate tax cuts or an equivalent scale increase in government expenditure on infrastructure and green energy projects?

Answer 1

In 2011, when the economy began to recover from the recession, the NDP criticized government expenditure on infrastructure and green energy, claiming that corporate tax cuts did not provide enough stimulation.

[i] The anticipated infrastructure spending by the NDP is, in fact, a fiscal stimulus. As it is not automatically included but recommended by the NDP, such sending is a discretionary fiscal policy.

[ii] Yes, spending on infrastructure and green energy will be beneficial, as it will create more jobs directly or indirectly, making the country more investor-friendly, as well as by creating a plethora of new opportunities in the economy, causing aggregate demand to shift rightwards, boosting the recovering economy.

[iii]According to the data, tax cuts have less impact on the economy than government spending on infrastructure and green energy initiatives. Cutting taxes will increase discretionary money in the hands of individuals for a limited period of time, but government expenditure will not only boost the economy by providing many opportunities, but it will also continue to grow in the economy owing to the multiplier effect, making it the preferable alternative. As a result, it can be inferred that government expenditure has a greater impact than tax cuts.