Macroeconomics Case Study Example | Topics and Well Written Essays - 1500 words

Macroeconomics - Case Study ExampleIn otherwise words, the level of investment determines the level of saving and not the other way around (Michl 2002, p.43). The point has been argued for the next 70 years and both theories have at times fallen in and out of favour.Thomas Palley of the AFL-CIO wrote in a 1996 paper that, The view that saving causes investment is widely identified with classical macroeconomics, while the view that investment causes saving is widely identified with Keynesian macroeconomics. However, deeper inspection reveals that both theoretical perspectives are capable of producing bidirectional causality, and this limits the usefulness of theory for resolving this crucial matter (p.5). Supply face economics has sour headlong into the demand side theories and have resulted in numerous, and yet valid, academic arguments on both sides. According to theory, ...saving suffer never be different from intend investment, in equilibrium (McCain 2007). The Paradox of Thrif t is one explanation, though not the only one, of how nest egg can influence an economys production and increase the unemployment rate.Supply side economics maintains that the marginal appraise income rate, the rate at which the next dollar earned is tax revenueed, directly influences peoples propensity to work, save, and invest (Gwartney 2002). By reducing the marginal tax rate investors are stimulated to invest in a business that may be too risky under a higher tax rate. Lower tax rates may spur people to work harder or longer hours and save their money. Indeed, the tax rate has often been used by governments to stimulate investment. According to Gwartney (2002), Of eighty-six countries with a personal income tax, fifty-five reduced their top marginal tax rate during the 1985-90 period, while only two (Luxembourg and Lebanon) increase their top rate. Countries that substantially reduced their top marginal tax rates include Australia, Brazil, France, Italy, Japan, New Zealand, S weden, and the United Kingdom. Many critics saw these deep tax cuts as a bonanza for the rich and argued that the increased tax revenues during this period were simply the result of an in increase in demand. However, during this period of tax cuts in the United States, ...the income tax revenue collected from the top 10 percent of earners rose from $150.6 billion in 1981 to $199.8 billion in 1988, an increase of 32.7 percent (Gwartney 2002). It can be inferred that a lower rate and increased revenue were the result of a massive increase in wealth for the top 10% that came from detonating device investment. It would seem that supply side economics had proven itself once and for all.Demand side theorists continued to point to the Paradox of Thrift and its effect on breathing in and production. Advocates of demand side economics contend that, ...a decrease in spending leads to a decrease in employment, which leads to a further decrease in spending, which leads to a further decrease i n employment, which leads to a yet further decrease in spending, and so on (Thies, 1997). Some economists contend that corporate cost exquisite is a path to a corporate paradox of thrift which could lead to massive layoffs and firings (Shostik 2002). Individual savings decreases spending for the consumer class and so any increase in savings decreases consumption and increases