Tax and Spend

img28Today we are going to talk about government and economy. Sounds like history lessons right? hehe

Okay, we don’t know much about how the whole system of government works but we know two things about them; they tax and they spend.

Sounds like a bad guy right? Not really. In fact, those are the most influential things that government can do in our economy. I going to talk more about US government as they have longer history and we might get something from it.

Before our time, government and economy were not as related as today. Government left the matter to market players such as firms, investors and customers. They played nice with each other and live happily ever after except they were not. The former is correct that they played nice with each other, perfectly followed the theory of Microeconomic( supply vs demand theory). However the second part, which applies to everything in reality, is not true.

Then come the Great Depression. People started questioning why depressions happen. According to supply and demand theory, this is not possible. Along come the Macroeconomists that try to explain three most important thing that micro can’t explain

  1. Inflation
  2. Aggregate Growth
  3. Unemployment

Government role in economy started to increase as microeconomists suggested that government should play a role as a buffer. Here are two main action that government has to take accordingly:

Expansionary: Reduce tax and increase spending to get the economy from slumber/recession

Contractionary: Increase tax and reduce spending to slow overgrowth economy (to reduce inflation).

But what happen if economy is in recession and inflation in a rise? That question is the beauty of macroeconomy where people are trying to explain the reality that’s not suppose to exist in theory.


  1. #1 by syia on February 10, 2008 - 2:58 pm

    theory economy syia belajar kelas Macroecons 🙂

  2. #2 by ChampDog on February 11, 2008 - 1:59 am

    Maybe one day, there will be theory or formula to explain that and that formula could be 100 pages long. 🙂

  3. #3 by kaklong on February 14, 2008 - 1:44 pm

    Hurm.. sure from your macro class. haha =P anyway, why isn’t your adsense showing up? something wrong?

  4. #4 by Anne on February 14, 2008 - 3:56 pm

    Irwan, you wrote just like my lecture. Reminds me to my macroeconomics class :)…Anyway, thank you for refresh me about it.

  5. #5 by tabuxander on February 16, 2008 - 10:18 pm

    I agree with you. The government should spending to enhanced economic growth. Without them we unable to move forward.

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