Sep 23 2011

Fiscal stimulus, the Swiss way

Parliament gives green light to government economic boost plan. – swissinfo

In the last two weeks, both my countries, America and Switzerland, have put forward stimulus packages aimed at helping their economies avoid entering a second recession. The US American Jobs Act, announced by President Obama to the US people two weeks ago today, will provide relief to American businesses and households mostly in the form of tax cuts. Some new spending on infrastructure, primarily schools and transportation, is provided, as is continued relief for unemployed Americans.

The chart below shows how the American Jobs Act plans to spend the proposed $447 billion. 

Clearly, the largest single category of spending proposed by the AJA is in the form of tax cuts for American households and firms (a combined 54.8% of the total). The purpose of tax cuts, of course, is to provide households with more disposable income with the hope that household consumption will increase, thereby increasing demand for goods, services, and ultimately labor, which would bring down unemployment. Businesses will also enjoy a cut in the taxes they pay when employing workers, so the costs to firms that hire new workers will be lower if the bill is passed. Extending benefits to workers who are already unemployed makes up a relatively small component of the American stimulus plan, while infrastructure and education spending, both which contribute to the long-run growth potential of the US economy, make up less than a third of the $447 billion package.

Let’s now look at the Swiss stimulus package, approved by the Swiss parliament today following a debate that lasted just seven hours. (For comparison, the American Jobs Act will require months of deliberation and when it is ultimately passed will likely have been completely modified by the American congress). The chart below shows where the $950 million of spending announced by Switzerland will be spent.

The biggest difference, as can be seen, is that a full 57.5% of the Swiss stimulus comes as relief for unemployed Swiss workers, compared to just 14% of America’s package. The 24.4% spent on research and development will go towards “a research and innovation programme, helping to translate ideas into successful business plans.” The subsidies for Switzerland’s tourist industry will come in the form of low-interest loans to businesses in the hotel and travel industry, which has been adversely affected by the recent appreciation of the Swiss franc, which has reduced tourism in Switzerland as Europeans and others have found it more expensive to travel to the country in recent months. Tourism is one of the largest sectors in the Swiss job market, so the spending on unemployment benefits will bring direct relief to individuals affected by that industry.

To compare the two country’s stimulus packages (America’s is only in the proposal stage, while Switzerland’s has been approved and will begin being implemented soon), is a study in two different economic philosophies. One major difference is the obvious lack of tax cuts in the Swiss plan. Such cuts were proposed by the conservative party in Switzerland, but the country’s finance minister, supported by the center-left party, argued that “tax policy should not be shaped by the current monetary situation.” She is referring to the fact that Switzerland’s stimulus in needed in response to the strong Swiss franc, not due to any underlying problems in the Swiss economy. The Swiss plan targets relief directly at those industries affected by the strong currency, tourism and high skilled manufacturing, which stands to benefit from increased spending on R&D. 

The US plan, on the other hand, includes over $240 billion (almost 55% of the total) in tax cuts, which while they do increase households’ disposable incomes, do very little to guarantee an increase in total spending in the economy. The last two rounds of stimulus in the United States, the 2009 American Recovery and Reinvestment Act, and the 2008 tax rebate program under George W. Bush, both included significant tax cuts to Americans (all of the Bush stimulus was a tax refund). Neither of these packages produced much growth for the United States, although the ARRA likely prevented unemployment from rising higher than it would have without a stimulus.

Switzerland’s plan includes no tax cuts, instead it offers direct support to particular industries in the form of government spending, and helps unemployed workers continue to spend and contribute to aggregate demand by maintaining their incomes during their period of unemployment. Switzerland’s stimulus, it could be argued, is more of a demand-side fiscal stimulus than America’s, which, due to its large tax cuts, places more of the responsibility for increased aggregate demand on the private sector. However, the 31% of the American plan that goes towards school and transportation infrastructure, and the 14% that goes towards continued unemployment benefits, should have positive demand-side effects, and should help increse employment and output in America if the bill is passed.

Discussion Questions:

  1. What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
  2. Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?
  3. Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

51 responses so far

51 Responses to “Fiscal stimulus, the Swiss way”

  1. Alex Wangon 06 Oct 2011 at 6:14 pm

    Put the US stimulus plan and the Switzerland stimulus plan in comparasion, we can conclude that the former one is a relatively long-term plan.

    The US plan: Tax cut compose a significant portion could not be expected to result in an immediate economic acceleration than the other one do. Because tax cut for household is trivial that would not increase a single household's deposable income considerably. For instance, giving $499 to an individual, he/she can buy an Iphone; but give $1 to 499 persons, every one could not buy anything but an lollipop (Would you feel much better if someone give you only one dollar?). Although total deposable income seems to have increased, total spending doesn't raise as much as expected. Only after one year or two goes by, households can feel and recognize the benefit of this stimulus plan and because accumulated tax cut is an big number, they are going to actually spend more. By that time, the economy would have already run in "physicological depression" for one or two years and the plan would have seemed to "fail."

    And for unemployments in US, they actually couldn't benefit much because tax cut on household and business would not increase the money they could spend directly. Thus the plan is actually and unobvious way to encourage unemployments to get employed. But the Swiss plan is somehow conveying a message to unemployments that "you don't need to work but me, the government, would feed you."

    At last, the composition of R&D is greater in the US plan than in the Swiss plan. While R&D is an unquestionable long-term stimuli, the US plan is more likely to be an long-term plan, which means it focus on future economic growth rather than immediate growth.

    After all the US plan seems to be wiser because it contains a long-term consideration. However I also doubt that if the US cannot fix current economic problems, how could it move forward to pursuit future prosperity?

    ( Isn't that if US enforce the swiss plan, she could fix current protests, "Occupying Wall Street" due to the society's heavy burden on unemployment, more quickly?)

  2. sophie zhouon 27 Apr 2012 at 3:41 am

    I agree that tax cuts on household and business would not benefit much since that money can't be spent directly. That money might not end up being disposable income but end up paying off some debt. Thus, these people are still stuck in a vicious cycle.

  3. lzhang2on 30 Apr 2012 at 1:57 am

    Tax cut is trivial and only applies to those who have jobs. Those who are jobless are not affected by this plan at all. Therefore the aggregate demand is not going to change as much.
    Thanks for pointing out the R&D is a long-term stimulus plan, it may be effective in the long picture, but cannot really change the situation in a short term.
    But the Swiss do also spend a fair amount of portion on R&D to improve the output, 24.4% of $950 million will improve the national efficiency.

  4. Alex Wangon 06 Oct 2011 at 6:22 pm

    I would like to make two spelling corrections on my previous comment:

    1. Not "deposable income" but "disposable income". This error exists several times in my passage.

    2. not "physicological depression" but "psychological depression." (My mind was messy and gross when I was typing that comment)

    My apology.

  5. dnyanzion 05 May 2012 at 5:14 pm

    @Alex Wang
    I think you forgot to mention "comparasion" instead of "comparison."
    Just joking!
    Anyways I completely agree with you that Research and Development is a long term investment which will generate growth. I also liked the fact that you used examples in your explanation.

  6. lzhang2on 30 Apr 2012 at 1:50 am

    What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    Look at the two charts of the stimulus policy about where the money goes, we can clearly see that the swiss government spends most of its funds on unemployment benefits to trigger the demand. It focuses more on people. When the unemployed have money, they can spend it. So more people can still spend their money, therefore the aggregate demand is promised. The United States spend more on tax cuts, which are proven to be ineffective over the last few years. The aggregate demand remains stagnant.
    Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?
    Budget surplus can induce more government spending, hence aggregate demand. Austerity is the ultimate result for the Americans due to their budget deficit. Fiscal policy includes government spending. The US government will not be as able to use expansionary fiscal policy to increase the AD as the Swiss government as it needs to pay back its debt. The Swiss can generate more government spending, hence to push the output level towards full employment.
    Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    I think it depends on the economy environment. If the atmosphere is optimistic, then tax cuts will be more effective in raising aggregate demand because people are willing to spend money than saving. However, it will be an instinct for people to save if the economy is experiencing a downturn. People will be worried about their benefits such as pension or their ability to spend in the future in case the economy never recovers. In this case, government spending on unemployment benefits is more effective as people feel more secure with some money in hand. They are not afraid to spend money.

  7. lgade2on 03 May 2012 at 9:48 am

    Hey,
    I enjoyed reading your response. Your response to the second question was good; and more detailed than my own. It helped me understand the issue a bit better.
    Thanks

  8. bhejaichon2on 07 May 2012 at 6:44 pm

    i agree with all of your answer in regard to the questions. for question 3, I think government spending on unemployment benefits may have more of a direct effect because since unemployed receive little they spend a lot on necessities but an increase in their benefits may lead to more spending on necessities of even luxury goods.Great post!

  9. lgade2on 03 May 2012 at 9:45 am

    Switzerland's stimulus package is more of a demand-side policy than the AJA policy of the United States. This is because the Swiss plan focuses a majority of the government spending on unemployment benefits; which are aimed at aiding the workers who have suffered unemployment as a result of the contracting tourism industry. This will allow them to retain their purchasing power to a certain extent; and therefore reduce the contraction in AD.

    The fact that the funding for the Swiss plan will be taken from an expected 2011 budget surplus illustrates that the Swiss government can afford to put more money into more short-term policies, whereas the US policy is needed for more long-term policies.

    In my opinion, government spending of a certain size will have a greater positive impact on aggregate demand than tax cuts of the same size. This is because government spending give consumers the incentive to increase consumption, and businesses the incentive to invest; whereas a tax cut will provide households with a higher after-tax income; which will not necessarily go into consumption (especially in a time of low consumer confidence).

  10. Mirren Mecathumon 09 May 2012 at 8:19 am

    Hi lgade2,

    We came to the same conclusion for the third question but both has totally different reasons. That was really interesting reading your response as a tax cut is rather risky to play around. The way in which money is spent by consumers cannot be controlled and governments can only advice. Therefore it is safer to go with the government spending method.

  11. sophie zhouon 03 May 2012 at 8:19 pm

    1. What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    The Swiss stimules package is a more demand side policy because hile switerland offer direct support to particular industries in the form of government spedning, the .US stimules provides tax cuts in the hope that this will provide household with more disposable income. The varies types of spending will contribute to the country's demand because the plan target relief directly at those industries effected by the strong swiss frank, which are tourisam and highly skillled manitfaturing, which will benefit fromt eh increased spendings.

    2. Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?
    The budget situation in the two countries impact the ability for each country to promote the macroeconmic objective of full employment because switerland 's stimulus is going to be paied by the budget surplus, which means it is able t provide full relief for unemployed swiss workers through subsidies of low interest lean to business, which will provide full employment. On the other hand, the u.s stimulus package is expected to have a deficit of around 10% of the country's GDP, thus they cannot afford to provide real relief to their people. Instead, the us is doing it in terms of tax cuts, which will increase the househo;ds disosable income, but not gurantee spending in the ecnomy. Therefore, the number of jobds might not increase.

    3. Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    4. Government spending will more likely to have a deirectly expansionary affect on aggregate demand since tax cuts will only increase the households disposable income but not always gurantee spending on the eocnomy. By having large tax cuts, it willonly place more of the responsibility for aggregate demand on the private sector.

  12. axu2on 07 May 2012 at 4:50 am

    Hi,
    For your question 3, I want to point out my perspective, that if household is posable income is increased, wouldn't it guarantee spending on the economy? Where as the same, if people have more money, they would use it to buy goods and services?

  13. kedwardson 09 May 2012 at 3:52 am

    @sophie zhou

    I found your remark, in the third response, about household spending quite interesting, and I very much agree that consumer behavior can be unpredictable, especially emerging from a recession. It's best for the government to take matters into their own hands. Thanks!

  14. dnyanzion 05 May 2012 at 5:04 pm

    1) What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    Switzerland's stimulus package is more of a demand-side policy because it focuses on increaseing transfer payments namely unemployment benefits. With this money the unemployed can still purchase several goods and services thus increasing aggregate demand. The US focuses more on tax cuts increasing disposable income, however this may not lead to an increase in AD.

    2) Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?

    Since Switzerland has the reserve from the last year they can afford to use expansionary fiscal policy such as increasing government expenditure, this added to the revenue from 2012 will mean that Switzerland has the ability to increase spending. The US on the otherhand is forecasting a 10% deficit meaning they are spending more than they are taking in. If the plan of tax cuts does not stimulate aggregate demand as they expect then the government revenue for 2012 will fall even further meaning they are even less in the position to implement these fiscal policies.

    3) Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    It is tough to answer but I think government spending on unemployment benefits may have more of a direct effect because since unemployed receive little they spend a lot on necessities but an increase in their benefits may lead to more spending on necessities of even luxury goods. Whereas people on an average income with tax cuts might decide to save the money as their income comfortably covers their expenses at the time.

  15. axu2on 07 May 2012 at 4:47 am

    What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    Because of hile switzerland offer which directly supports industries as “government spending,” Us stimules had to provide tax cuts so to provide each family with more income. This offer that benefits unemployment was made in hope to raise country’s demand because this targets directly at industries who were affected. With more money, the aggregated demand would rise.

    Another difference between the two plans is how they will be paid for. In Switzerland, while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?“the money is to be taken from an expected 2011 budget surplus,”
    Because of the budget, which induced more of government’s spending, which affected greatly Switzerland and Us’s employment rate. Switzerland’s budget are paied by their budget surplus which’s result would be proved jobs for the unemployed. Yet, US’s budgets are most likely to result in frugality.

    Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    Personally, I think government spending on unemployment benefits would have an direct effect on aggregated demand because if unemployed people receives benefit, thus get lazy and spend recklessly.

  16. bhejaichon2on 07 May 2012 at 6:41 pm

    1) What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    – Switzerland's stimulus package is more of a demand-side policy than the AJA policy of the United States. This is because the Swiss plan focuses a majority of the government spending on unemployment benefits; which are aimed at aiding the workers who have suffered unemployment as a result of the contracting tourism industry. This will allow them to retain their purchasing power to a certain extent; and therefore reduce the contraction in Aggregate Demand.

    2) Another difference between the two plans is how they will be paid for. In Switzerland, while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?“the money is to be taken from an expected 2011 budget surplus,”
    – Since Switzerland has the reserve from the last year they can afford to use expansionary fiscal policy such as increasing government expenditure, this added to the revenue from 2012 will mean that Switzerland has the ability to increase spending. The US on the otherhand is forecasting a 10% deficit meaning they are spending more than they are taking in. If the plan of tax cuts does not stimulate aggregate demand as they expect then the government revenue for 2012 will fall even further meaning they are even less in the position to implement these fiscal policies.

    3) Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    – I think government spending on unemployment benefits may have more of a direct effect because since unemployed receive little they spend a lot on necessities but an increase in their benefits may lead to more spending on necessities of even luxury goods. Whereas people on an average income with tax cuts might decide to save the money as their income comfortably covers their expenses at the time.

  17. jmcewenon 11 Mar 2014 at 3:08 pm

    Good answers, I would agree with all questions. I like the examples mentioned in question 3, it shows the details which explain what I said over government spending having a more direct effect over a assumed effect of tax cuts.
    Good post.

  18. kedwardson 09 May 2012 at 3:54 am

    What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?

    Switzerland’s stimulus is more of a demand-side fiscal stimulus than America’s, which, due to its large tax cuts, places more of the responsibility for increased AD on consumers and businesses. The policy for reducing inflation in Switzerland is aimed at reducing aggregate demand, rather than reducing the costs of production as would occur in cost-side policies, the opposite of demand-side stimulus and what occurs in the U.S. Spending in the Swiss economy will allow for relief to businesses and firms in the private sector, who can control aggregate demand.

    How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?

    Switzerland is not going to have to come up with extra funding or relocation of spending within their budget because they have money already available. The United States will have a deficit and budget reorganizing in order to accommodate fiscal & correcting policies. This can limit the full impact of the U.S. policy in the event they have to be more conservative with their spending.

    Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.

    Government spending will probably have a more direct expansionary effect on aggregate demand. Because the government will be able to control where their spending goes in the economy, and monitor the progress it will be more effective rather than a tax cut which the money given to households may or may not be spent effectively to balance out the economy. If government intervention is going to exist it may as well be effective and beneficial.

  19. Mirren Mecathumon 09 May 2012 at 7:50 am

    1.What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    Switzerland’s stimulus package is more of a demand-side policy than the United States because in Switzerland, the stimulus package set by the government has more of that nature by having to spend more on unemployment benefits than the AJA policy that is the one implemented in the United States. There will be a contraction in aggregate demand as by supplying unemployment benefits, it will help standardize the purchasing power as the tourism industry is deteriorating.
    2.Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?
    The situation in Switzerland is different from the U.S as Switzerland already has sufficient amount of funds. The U.S on the other hand woyld have to find ways of coming up with ways to get enough funds and this can only be done by fiscal policies.
    3.Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    Tax cuts from views of consumers would make them the most “satisfied”. Telling the society to spend rather than save is easier to do rather than the other way around. However, because the economy is not doing at its best, consumers would look out for themselves and the automatic thing to do would be to save in this case. (Consumer confidence decreases). Therefore, government spending would be my choice in this case.

  20. Monique Ton 23 May 2012 at 12:46 am

    Hi Mirren,
    You brought up a good point in your last answer, about the consumers being "satisfied". I would agree that, as is the case for most government policies concerning economics, the government is not only concerned with the economic benefits of their actions, but also the political implications. The goal of the government is often first and foremost to get re-elected… Now, that normally coincides with a good economy since people like that, but it is possible that the government focuses solely on the short-term benefits, at the expense of the long-term wellness of the economy (eg lots of spending now leads to a greater deficit problem in the future). Thanks!
    Monique

  21. Monique Ton 23 May 2012 at 12:39 am

    What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    The Swiss stimulus package focuses on increasing aggregate demand directly. By increasing government spending, they increase a component of aggregate demand, therefore making it a demand side policy. The American stimulus package cuts taxes in a hope that it will increase consumption and therefore AD, but they have no way of ensuring that is what is will do… People may just save their money instead. The Swiss plan contributes to AD through direct government expenditure, whether that is into research and development or into unemployment benefits.

    Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?
    In an economy with a surplus, there is more room to use expansionary fiscal policy, because there is more money available for government expenditure. When there is already a deficit, it means that any money being used for expansionary policy is contributing to the deficit, which in time creates economic problems for an economy. With too high a deficit, the government will eventually have to make spending cuts, which will lead to unemployment in the long run. Overall, the country is in a much better situation if they have a surplus.

    Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    When government spending of a certain size is put into the economy, all that money will for sure contribute to increasing aggregate demand. In addition, the multiplier affect may lead to the return on investment being even higher. However, with tax cuts, all the money that people are receiving from those cuts will probably not be put straight back into the economy – they will probably save at least some of it, for example. This means that a tax cut of equal size to government expenditure will have a smaller expansionary effect on aggregate demand.

  22. jyoungon 18 May 2013 at 1:50 am

    1. What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    The US involves more supply side spending like all of the tax cuts for firms. Whereas Switzerland has a larger emphasis on unemployment benefits at 58%, much higher than in the US. This is to increase demand. These unemployment benefits will substantially increase AD because for people will have more income to spend.
    2. Another difference between the two plans is how they will be paid for. In Switzerland “the money is to be taken from an expected 2011 budget surplus,”, while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?
    The US is basically just barrowing the money for the stimulus package whereas Switzerland is using ‘excess’ tax revenue, surplus. With a surplus fiscal expansionary policies can be more effective because there is not the negative of debt. The US is just going to run a greater deficit and dent than before.
    3. Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    It depends on the viewpoint you take, arguably (and only if done right) government spending can increase AD by more because of its multiplier effect. With a tax cut it is possible household will just put the extra income into savings, causing a leakage.

  23. jyoungon 18 May 2013 at 1:55 am

    # Monique T
    Good answers, I also liked how you pointed out how with government spending you can be sure much of it will go straight to increasing AD with the added benefit of the multiplier, whereas tax cuts can lead to more savings and not translate directly into more AD. Naturally tax cuts can sometime be more popular, the government also must make the decisions on whether they should run a deficit or not.
    -jyoung

  24. ylahhamon 19 May 2013 at 4:17 pm

    1.
    The claim is made because Switzerlands stimulus package provides direct releif to the unemployed which will cause aggregate demand to rise because they will have income to spend on necessities whereas the US’s package is more focused on supply side because it focuses on tax cuts and spending on education

    2.
    the budget situation means that the US will be ‘crowding out’ since they are running a budget defecit and will therefore have to borrow to pay for their stimulus package which will affect their future prospects for stimulus packages since they will be in debt but Switzerland’s package is paid for from a budget surplus and so it will not have any negative side effects

    3.
    tax cuts will have a more direct effect. This is because when consumers have more income, they will most likely spend more but government spending could take a long time to come in to affect,for example spending on education will take a long time to have an effect because it will cause citizens to be better off financially in the long term, which means aggregate demand will increase but after a very long time.

  25. stakon 19 May 2013 at 4:54 pm

    1. Switzerland’s stimulus package can be considered more demand-side, because more than half of the money that will be spent will go to the unemployment benefits. Jobless people will have more disposable income now that they can spend which will trigger the aggregate demand to increase. America’s policy has more to do with tax cuts and investing on human capitals (education)

    2. The fact that the Swiss government has the money and American government does not have the surplus and has to go on a deficit means a lot. Fiscal policy involves the government to directly spend money, and if the government does not have the money to do that, it will end up borrowing money from the bank which will increase the interest rate that goes against the thought. Thus Swiss government is in a better position

    3. The direct government spending will have an impact on the economy, and the significance will depend on the multiplier effect. However the tax cuts will vary. The more disposable incomes that become available due to the tax cuts won’t go straight into the economy. It will depend on a lot of things, for example the consumer confidence. Maybe they are willing to save the extra money rather than to spend

  26. stakon 19 May 2013 at 4:55 pm

    # ylahham

    I totally agree with your responses
    I liked how you pointed out that it will take some time to really notice the effect of the government spending in the economy because it has to go through multiple cycles

    Good answers!

  27. rparsonon 20 May 2013 at 2:13 am

    1. What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    This means that Switzerland’s package focuses more upon increasing aggregate demand. This is done through the higher unemployment benefits, which are intended to increase AD by allowing the unemployed to spend more. The Swiss plan is weighted towards demand-side policies. This stands in contrast to the American plan, which has a greater emphasis on tax cuts for businesses, and is more balanced overall between the supply and demand sides.
    2. Another difference between the two plans is how they will be paid for. In Switzerland, while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment? “the money is to be taken from an expected 2011 budget surplus,”
    In the long term, a deficit can lead to a level of debt which can no longer be financed. At this point, it becomes harder for a country to take out loans due to decreased lender confidence. This means that in the US, there is a real long term cost to increasing deficits. In Switzerland, the fact that a deficit will not be run means that these policies can be continued over the long term.
    3. Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    It can be argued that government spending will have a greater effect because individuals are more likely to save money rather than spend it, and that the multiplier effect will magnify the value of this spending. However, this is somewhat flawed, as the government has less of an incentive to wisely spend its money and thus makes bad bets with alarming regularity, losing some of the value. Also, I am fairly sure that the multiplier does not exist exclusively in response to government spending. Private spending will do the exact same thing, but will be invested more carefully, and will have a better long term effect.

  28. rparsonon 20 May 2013 at 2:17 am

    # ylahham
    I found your third answer to be quite interesting. It is certainly very important to consider both short and long term results when taking an action as large as this stimulus.

  29. MeganKon 20 May 2013 at 3:51 am

    1.
    Because the plan for Switzerland does focus much more on the increase in their transfer payments through the unemployment benefits to try and help the many Swiss workers who were unemployed. This way the unemployed are still able to buy and sell through the economy, and increase aggregate demand. The US stimulus plan does focus a lot more on the tax cuts increasing the amount of income a household can spend, but this may not lead to an increase in AD as the households may just put the extra “spending” money into a bank for later.
    2.
    Another difference between the two plans is how they will be paid for. In Switzerland, while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?“the money is to be taken from an expected 2011 budget surplus,”
    Well, because Switzerland was able to still gain from the surplus budget from the year before, it was easy for the nation to decide to use the surplus for benefits the following year. On the other hand, the US was planning on announcing a 10% deficit that would cause aggregate demand to actually decrease in the long run.
    3.
    I think that the spending on unemployment benefits will have a good effect on the expansion of the economy in the short run, but if people begin to leave their minimum wage jobs just to get decent unemployment benefits, that’s when the long term effects become very, very dangerous.

  30. MeganKon 20 May 2013 at 1:19 pm

    @stak

    I always wonder how a government thinks that these slow, small tax-cuts will effect the consumer confidence, because especially for foreign investors, this unwavering commitment almost against the good of the market would cause them to want to invest in other international markets. And without the input of foreign investors, local consumers would probably be less likely to input money for luxury/non-necessity goods.

  31. Yada Pruksachatkunon 20 May 2013 at 4:36 pm

    What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?

    The claim that Switzerland’s stimulus package is more of a demand-side policy means that all of the government’s package is going to demand-side related items, and increasing government intervention within the different sectors that are being affected (such as the unemployment benefits,tourist industry, and research and development. Like many have said before me, the injections into the industry will increase aggregate demand for the unemployed, whom I presume constitute a significant percentage of Switzerland’s population. I assume so because it would be only logical for the government to spend so much money for the unemployed only if the aggregate demand has dropped significantly due to the unemployment rate. Research and development, however, can be seen as a supply side policy, as it can create supply shocks which can shift the long run aggregate supply curve to the right due to technological breakthroughs.

    On the other hand, the American stimulus package constitutes of market-based supply side policies, which include tax cuts. By decreasing taxes in households, households are able to spend more (even though this is plausible). By decreasing taxes in corporations, the LRAS curve will shift to the right as the firms are able to hire more employees with less production cost and taxes, and can lower the price of goods.Therefore, the American stimulus package is mainly supply-based.

    Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?

    Switzerland is more able to sustain expansionary policies than America, as they are only using money they already have. However, America, which has already hit its debt cieling, cannot use increases in government expenditure (interventionist-based supply side policies) to stimulate the economy, because that will mean America will run further deficits. Therefore, they rely on market-based policies which will reduce government revenue via tax cuts, but will also avoid adding onto the debt burden America’s stimulus package will help reach full employment by reducing production costs in firms, allowing them to hire more labor. Switzerland, on the other hand, is able to put government injections instead of austerity measures because of its surplus. This will achieve full employment because with more money circulating in the system, businesses are able to hire more workers, and aggregate demand for products will rise. Therefore, the economic situations of the two countries determine which approach (market based versus interventionist) both take on their stimulus packages.

    Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.

    I think government spending will have a more direct expansionary effect due to the Keynesian multiplier. Also, households and businesses are unpredictable, and tax cuts may result in more saving instead of more spending during recessions, which will not increase aggregate demand. However, government expenditure is a safer and more predictable way of injecting more money and demand into the system.

  32. cameron7on 20 May 2013 at 4:42 pm

    1) Switzerland’s stimulus is more of a demand-side fiscal stimulus than the US’s, which, due to its large tax cuts, places more of the responsibility for increased Aggregate Demand on consumers and businesses. The policy for reducing inflation in Switzerland is aimed at reducing aggregate demand, rather than reducing the costs of production as would occur in cost-side policies, the opposite of demand-side stimulus and what occurs in the U.S. Spending in the Swiss economy will allow for relief to businesses and firms in the private sector, who can control aggregate demand. The government should adopt a policy such as Deficit Financing, to reduce taxes in order to increase spending and hence aggregate demand in order to relieve firms.

    2) Switzerland is not going to have to come up with extra funding or relocation of spending within their budget because they have money already available. Switzerland’s reserve can ensure that the country survive until the economy booms again. The United States will have a deficit and budget reorganizing in order to accommodate fiscal & correcting policies. This can limit the full impact of the U.S. policy in the event they have to be more conservative with their spending.

    3) Government spending will probably have a more direct expansionary effect on aggregate demand. Due to the fact that the government will be able to control their spending in certain sectors, and monitor the progress, it will be more effective rather than a tax cut which the money given to households may or may not be spent effectively to balance out the economy. The government intervention enables benefits to society and thr economy as a whole.

  33. Yada Pruksachatkunon 20 May 2013 at 4:43 pm

    @megank

    I was wondering how you thought the government could ensure that people spend their money rather than save it in the bank, in the American Stimulus Package?
    If I was the government, I would use monetary policies and decrease interest rates, as well as increase inflation rates temporarily in order to stimulate the mindset of, “I need to buy this before prices get higher later.” Then, aggregate demand would increase.
    -Yada

  34. cameron7on 20 May 2013 at 4:45 pm

    @Yada Pruksachatkun

    I definitely agree with all of your answers, especially when you state that Switzerland is more able to sustain expansionary policies than America, as they are only using money they already have. The Swiss reserve enables the country to survive and keep up government spending until the economy booms again. However, America, which has already hit its debt cieling, cannot use increases in government expenditure. All in all, really good and thorough answers.

  35. nwarneron 20 May 2013 at 6:47 pm

    1. What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    It is claimed that Switzerland’s plan is more of a demand side plan because a higher percentage of the income is meant to be used to increase demand through the unemployment benefits. However, this assumption is wrong as almost a quarter of the stimulus is spent on research and development which is a feature of supply side economics. Also the author is assuming that tax rebates are not a form of demand side policy as policies to reduce taxes would have a similar effect as unemployment benefits as they both give consumers more money to spend. Tax cuts for businesses included in the US business impact both supply and demand side as the money could be invested impacting supply side or in raises which gives more money to spend. The only supply side policy in the US part is the infrastructure spending which is 31% of the total only slightly more than the Swiss plan.
    2. Another difference between the two plans is how they will be paid for. In Switzerland, while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment? “the money is to be taken from an expected 2011 budget surplus,”
    This shows that Switzerland has a budget surplus from its budget so it uses extra revenue to afford the smaller stimulus but since the US has so much of a deficit it decided to pay for the stimulus by going further into debt. The Swiss plan will likely be more successful as it does not contribute to debt which increases consumer confidence in the economy and the policy which added to debt in the US will not have negative long term consequences in Switzerland.
    3. Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    In my opinion the tax cut will have more of a positive impact as not only will consumers have more money to spend or invest they will also have increased confidence in the economy which will cause them to invest or spend more than tax cut itself. Also the Government spending is imprecise and often does little to nothing to actually impact the aggregate demand.

  36. nwarneron 20 May 2013 at 6:50 pm

    #rparson
    I agree with your point about how governments often make foolish decisions with where to invest money ($325,000 for a robotic squirrel). I also like your point that the multiplier works for private investment as well where waste such as robotic squirrels.

  37. aleeon 21 May 2013 at 5:58 am

    1. What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    Switzerland’s stimulus package is more of a demand-side policy because it “helps unemployment workers continue to spend and contribute to aggregate demand by maintaining their incomes during their period of unemployment.” The United States’ stimulus package only implies that the aggregate demand will rise due to the tax cuts. The spending in the Swiss plan guarantees an increase in aggregate demand as those who are unemployed and are at lower living standards will have the money to consume necessities.

    2. How does the budget situation in the two countries impact the ability to use fiscal expansionary policy to promote the macroeconomic objective of full employment?
    Because Switzerland is taking surplus money to pay for its plan, the government has more room to use money as government spending. The US, however, will further its deficit and will have more pressure to increase its aggregate demand.

    3. Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    Government spending is more likely to increase aggregate demand because it affects a wider range of people. Tax cuts only affect those who are already employed, and the burdens of those who really need help will not be lightened.

  38. aleeon 21 May 2013 at 6:02 am

    Hello #nwarner!
    I had a different answer for number 3. I thought that an increase in government spending would have a greater expansionary effect on aggregate demand than a tax cut. An increase in government spending would help those who are at lower living standards more than a tax cut would.

  39. nikolay@pamojaon 21 May 2013 at 4:19 pm

    1. The statement refers to how Switzerland’s policy allows for those who have lost jobs to continue to provide demand by providing them with some extra income. This contrasts with the USA where the policy is mostly in the form of tax breaks, which do serve their purpose are not giving extra income in the same way. When someone is given $10 they are more likely to percieve it as a bonus and spend it as though it is disposable income, while having a $10 discount on a purchase is not viewed as extra money to be spend, even though the net affect would be the same if each were charged $20 in taxes, and the discount went to the taxes.

    2. The difference in ability to spend money is clear when it is recognized that switzerland’s economy is not doing poorly, rather they need the stimulus because their franc is so strong that tourism is down. This first allows the government to spend money with less worry about deficits, and second it lets then target the specific affected group. While in the USA whole of the economy isn’t doing so well, which means that spending needs to be a greater amount for it to be affective as it needs to touch all sectors, and that the government has less money to spend.

    3. Government spending. As previously mentioned, for some reason people view $10 to spend is greater then $10 off of their next purchase. Perhaps it is the wait time with the rebate, or the fact that with the taxes one never actually possesses the money.

    @# alee
    I had the same answer, but for a different reasoning, mine was as stated, that people are more willing to spend money in pocket then to spend money in order to gain a discount.

  40. clundon 22 May 2013 at 1:00 pm

    The Swiss stimulus package is more demand-side policy because it will affect the aggregate demand and therefore GDP more than the American. The unemployment benefits will distribute money out to the unemployed who will then use it to buy necessity goods, and since they have a relative small income the marginal propensity to save will be very small and will therefor increase the GDP more than if Switzerland like USA had chosen to cut taxes for everyone, because not everyone will need those extra money they get from the tax cut, and therefor the marginal propensity to save will be increase and GDP won’t be affected as greatly. Both the research and development and the subsidies to tourists will increase the demand for labor and therefor lower the unemployment rate, but will also affect aggregate demand since it will increase spending as well. The tourist will bring in their money to the country, and not only use them on hotels and travels but also on food and other goods which haven’t been given subsidies, this will therefor have a healthy effect on GDP if it’s effective to attract more tourists.

  41. clundon 22 May 2013 at 1:14 pm

    #alee

    Good answers, I like the pont that you’re were making that the tax cuts only affects those who are already employed and give them a bigger income, while the unemployed -those who would need the money the most and therefor also spend much more of it- doesn’t get anything from the tax cut, but only the much smaller percentage of unemployment benefits (14 % vs. 70%).

  42. msurninon 23 May 2013 at 1:24 am

    1. What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    Both policies, in essence, have the same goal, however, both of them are trying to achieve it through different ways. Switzerland is trying to increase demand through unemployment benefits, which will eventually increase labour in the country, while the US is reducing the taxes on firms, which should increase labour as well. Swiss perspective is that the unemployed will maintain their incomes during their unemployment, which keeps the aggregate demand stable and may even allow it to increase.
    2. Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment? “the money is to be taken from an expected 2011 budget surplus,”
    Switzerland is taking its money from government surplus to fund its plan, so it is working out well for them. The US, on the other hand is already in budget deficit, and, since it is financing its plan, it is tough for them to find the money and they will be in debt.
    3. Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    Both factors will certainly lead to increased aggregate demand, however, government spending will have a greater effect, because of the Keynesian multiplier. Tax cuts may encourage spending, as consumer behaviour is often unpredictable.

  43. msurninon 23 May 2013 at 1:29 am

    #clund I really like how you mentioned that tourism may increase aggregate demand and supply in the economy, and can be a simple solution instead of the government spending money or cutting the tax rates.

  44. kkozlovskison 23 May 2013 at 11:03 pm

    As because Swiss is focusing on the lower levels of the spciety, the demand will grow more, then USA’s demand overall. It is because if Swiss helps only poor, this means that the demand will grow only in these levels of society, but as we all know the lower levels make up the country. So what I mean is that if Swiss only will grow the demand in lower levels, the amount it will grow will be larger, then if US lower the taxes, and so demand will grow. It is because the demand in lower levels will grow more, then it would grow in all levels of society, it is because of the way economy works.
    Firstly, we need to understand that USA is taking from nothing, they have no spare money, but they are trying to make some money in the same time. I think that what US is doing is irrational, because how can you be sure that this policy will come alive, and you will make it up. But in the same time Swiss has some spare money, which they can spend on lowering the unemployment. I fully agree with them that this is a great way to lower the unemployment, if they have spare money. But I really disagree with US concept that they would risk to gain back the money by lowering the taxes for everyone, because what would happen if the system wouldn’t work, then they would end up in bigger debts.
    I think that the concept with goverment spendings would work better, because let’s say as Swiss did have some surplus on budget, then they can spend this money on lowering the unemployment, but if one chooses to lower the taxes, then there no guarantee, that this sytem will work. I really think that depending on the soceity is a bad way for the government to make money. As unemployment is a mocro economy’s problem, then it should be solved by the government, so if the government wants to lower the unemployment, then use your money to lower it, not depend on us to lower it.

  45. kkozlovskison 23 May 2013 at 11:08 pm

    # alee
    I agree with you that in Swiss case they will be able to do more actions with the demand and the money they had spared. Whereas US will need to do everything so that the demand grows. I really think that Swiss is doing a better job organizing their economy.

  46. ykim3on 23 May 2013 at 11:34 pm

    1.What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    – Swiss tries to work on the unemployment benefits by increasing demand. This helps people who do not have jobs can live with the government’s helps. However, in America, the government tries to reduce the taxes on companies. This means the government cares about suppliers.

    2.Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?
    – Budget surplus of Swiss can induce the government spending and its aggregate demand. But, the Americans have their budget deficit. Fiscal policy includes government spending. The US government needs to increase the demand.

    3.Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    – Both of them are essentially for increasing of aggregate demand. But personally, I think government spending on unemployment benefits might have more effects because helping unemployeed people can increase their confidents on spending.

  47. ykim3on 23 May 2013 at 11:41 pm

    # kkozlovskis
    Good job! I read your comments and overall I agree. Especially, I like your idea that decreasing the unemployment always guarantee the increase of demand.

  48. hkimon 24 May 2013 at 9:20 pm

    1. What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    -When they say that the Switzerland’s stimulus package is more of a demand-side policy than the United States, it literally means that the Switzerland government are trying to avoid another recession by increasing demands and they do this by increasing the unemployment benefits. As can be seen above, Switzerland has almost 60 percent being spent on unemployment benefits. This will allow the unemployed to have an income and spend more increasing the aggregate demand. The money going to research and development will become in handy in the long run as there may be some innovative discoveries that reduce the costs of production or make a machine produce more goods, etc. The money spent on subsidies on the tourism industry will increase aggregate demands because more consumers will be willing to get a tour since the price had decreased therefore increasing the aggregate demand.
    2. Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?
    – The government of Switzerland has money and the US government does not. This is the main difference between the countries. Since Swiss governments have money they can spend money (fiscal policy) but for the US, the government has to loan money from banks and later pay back with interests, and it will be in debt.
    3. Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    I think that the government spending will more likely have a direct expansionary effect on aggregate demand because the unemployed will start spending more as they have more income. If they only had 200euros a month to spend on food, shelter, etc and that increased to 500euros per month, they could spend some of that 300 euros on other necessities and save the rest. But still that some part of the 300 euro that they use will be a great effect on the aggregate demand.

  49. hkimon 24 May 2013 at 9:25 pm

    #MeganK

    I like how in the third question you mentioned that IF people left their jobs to get unemployment benefits that would be dangerous to the economy, That is exactly right! It would be very very dangerous! Thanks for bringing that up. Good job!

  50. Tasa Grujicon 28 May 2013 at 7:15 pm

    1. What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    To answer this question, we can simply look at the charts and examine what each country is aiming at achieving. The United States is focusing on the long-term plan having tax cuts which apply to people who have jobs, while Switzerland is increasing aggregate demand by increasing the consumption sector immediately by raising unemployment benefits. Switzerland offers direct support for those who can benefit the economy but cannot.
    2. Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?
    Because Switzerland has a budget surplus from 2011, the government can afford to use expansionary fiscal policies to raise the aggregate demand of their economy. On the other hand, the United States has a 10% deficit and the path they chose was to cut taxes. This will decrease the overall revenue of the government and focus only on the people who are employed and hope they will increase their spending.
    3. Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    I think that government spending on the economy is more likely to have a direct expansionary effect on the aggregate demand. Government spending is one of the components of aggregate demand and if it increases, so does the aggregate demand. In this case, the government is spending on the unemployed, therefore it is increasing consumption and ultimately aggregate demand.

    @rparson: I really enjoyed your response. I like the fact that you mentioned in the third question the multiplier effect and considered all aspects of the question.

  51. jmcewenon 11 Mar 2014 at 3:03 pm

    1.What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
    Switzerland’s stimulus package focuses 57.5% on unemployment benefits, which is all government expenditure, having a direct increase on their AD. On the other hand, the US’s stimulus focuses a combined total of 54.8% on tax cuts for households and businesses. This is likely to have an increase on AD, giving more households more disposable income and businesses more incentive to employ workers. This however is not a sure outcome, as households could choose to save instead on consume, leaking money out of the business cycle. Therefore it can be said that by a direct impact on AD over an assumed one, the Swiss stimulus package is more of a demand-side policy than the United States’.
    2.Another difference between the two plans is how they will be paid for. In Switzerland, while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?“the money is to be taken from an expected 2011 budget surplus,”
    Both nations can set out to accomplish the same economic goals, however the extent of which they accomplish them is different. The US will start with a deficit of 10%, limiting what the government can spend on new policies. They will be more hesitant to spend money, not knowing if it will be successful or not, fearful of increasing their deficit, creating long-term economic issues. With effectively less money to put into the economy, it will not be able to accomplish as much as Switzerland can. Switzerland can afford to take risks as they have a surplus, not limiting expenditure as in the case of the US. With more money to spend, the more they can allocate to the journey to achieving full employment.

    3. Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
    Looking at this through components of AD, there are more determinants for consumption or investment than Government expenditure. With consumption, if a certain size of tax cut is employed, this will increase disposable incomes for households, however just as easily, if their wealth is depreciating, for example, the value of their houses, they are less likely to consume and rather to save. This is the same for consumer/producer confidence, if they are not optimistic about their economic future, they are less likely to consume or invest, again turning to saving. This is always a possibility, rendering the possibility of tax cuts not being effective in fueling an increase in AD. This is not the same for Government expenditure however, which has a direct impact on AD. If the government decides to spend more, AD is increased by that amount, as the main determinant for government expenditure is the more money the government has, the more it can spend. So there aren’t other determinants restricting the effect it will have on AD.