Larry Lindsay, who is president Bush’s economic advisor has stated that he is currently optimistic regarding the situation of the American economy. He believes that the possibility of the economy facing a “double-dip” recession, whereby the economy appears to be recovering after a period of recession yet growth falls again, is unlikely. The economic stimulus has been generated from a recent tax cut which in turn has triggered investment. This fiscal policy seeks to influence the level of economic activity in the economy through the control of taxation and government expenditure.
Lindsay believes that there is incentive for new investment due to the effects of the tax cut feeding through into the economy having a positive effect on consumption within the economy. This concept relates to the Keynes theory which rejects the assumption that all markets would clear. A fall in aggregate demand would not simply lead to a fall in wages and prices and a restoration of the full-employment equilibrium. Instead there would be demand-deficient unemployment: as demand fell, there would be less demand for labour. ;Slowman, Economics:460;
However the multiplier effect denotes the trend where there is an increase in the rate of spending there will be a proportionate increase in national income, the value of the multiplier depends on the percentage of the extra income that is spent on the marginal propensity to consume. Therefore, the larger the increase in consumption of income, the larger the multiplier effect.
Due to the incentive for new investment people are creating aggregate demand followed closely by aggregate supply this in turn can reduce unemployment. Figures released on Friday showed American unemployment fell from 5.6% to 5.5% in February. Although the tax cuts have put an end to threats of a further recession, other sectors will be affected by the reduced funds such as the private sector and public services, once the economy has stabilised Lindsay will be obliged to replenish these funds.