In the last blog I explained about monetary and fiscal policy. Here, in the Khan Academy, it explains some more about taxes as they pertain to fiscal policy. In the last example, under fiscal policy, taxes remained constant and spending went up. To do that, the government has to take on more debt. So the formula looks like this:
⬆️ GDP = C + I + G ⬆️ – NX
Where C = private consumption, I = mostly business investments, G = government expenses, and NX is net exports. C and I remain constant, government expense goes up, so GDP goes up.
If taxes go down and government spending remains constant, private consumption and business investments will go up, so GDP will also go up. It is another way government can influence GDP:
⬆️ GDP = ⬆️ C + ⬆️ I + G – NX
Another way show it is in diagram format:
As I stated in my last blog, the difference (for the most part) between the two parties, Democrats and Republicans, is that the Democrats, usually tend to want to increase taxes and the Republicans want to decrease, or at least not increase, taxes. In both cases National Debt takes the brunt. The Republicans want to see business investments increase, and consumption along with it. Fiscal policy, as desired by the Democrats, is a more direct government influence, so they see quicker results than the Republicans. Again, this is just a very generalized point of view, and depends very much on the market conditions.
The question remains: How much more debt can the government take on?