Private economies are subject to a variety of fluctuations in inflation and employment. Can the government, through policies termed fiscal or monetary, help to smooth these out or mitigate their negative impact on citizens? Can government help move the economy toward low inflation and high unemployment? This issue was dramatically demonstrated in 2008 when confidence in financial institutions was badly shaken. To offset the Great Recession, the government passed the Recovery Act, which permitted tax cuts (tax reduction), spending by the Federal government (increasing government purchasing), and assistance to local and state governments (transfer payments). Debate surrounded what is termed the multiplier effect:   * are they higher for tax cuts or government spending,   * the differences in multiplier effect from different tax cuts,   * Incentive impact from tax cuts. Tax cuts shift the actual money available to people for purchases – termed disposable income — increases in taxes shifts GDP to the right and down, and vice versa. The multiplier effect works through the chain of spending – one person’s income is another person’s expenditure. The formula (much simplified) IS 1/ (1-MPC). This probably overstates the multiplier by ignoring variation in imports, price changes, and income taxes. The book asserts that tax cuts have a smaller multiplier than government spending because there is no assurance that every dollar of a tax cut will be laid out in purchases (or, although this is not mentioned, within the reporting period). If people are remitting a portion of income in taxes (Page 218 seems to be missing). To shift potential GDP, it is necessary to know or guess at the multiplier, so you know how much the government needs to spend to get the growth that is desired. In past years, for example, in 1999, the challenge is to reduce aggregate demand, and the procedure was carried out in reverse of the above. As long as the combination of spending and tax cuts generates the same aggregate demand curve, the outcome will be the same in terms of real GDP and prices. How much emphasis is placed on government spending versus tax cuts ends up depending on political perspective? Conservatives prefer personal actions and spending, while liberals accept government spending and action to accomplish the desired objectives. The effectiveness of all governmental interventions is impaired by several items. These include changing circumstances, inaccuracy in estimation of the multiplier, and inaccuracy in employment statistics, the long lag time between implementing something and its effect in the economy, and the fact that these changes are being suggested by politicians rather than economic experts (for whatever they are worth!). Reagan-era economists proposed that supply-side personal income tax cuts would increase working, saving, and making investments back into the economy. This does not always take into account the demand-side effects. People spend more when they have more money. Supply-side policies can increase inequality, and they certainly decrease tax revenues. Also, the timing of impacts may be uncertain and delayed. Monetary : one way that the government c