Fiscal Policy Simulation
In this paper I will be discussing the effects of the changes in fiscal policy in the simulation, I will discuss the effects of changes in fiscal policy using the aggregate supply and aggregate demand framework, I will list four key points from the reading assignments that were emphasized in this simulation, I will apply what I learned from the simulation to my workplace, and I will discuss my growing further results from the assessment.
Effects of Changes in Fiscal Policy
What were the effects of the changes in fiscal policy in the simulation? In the first scenario of the simulation, Frank, the Director of the Budget Office, states, "We have to increase jobs in the economy and improve overall confidence in the future of the economy." Keeping this in mind, I opted to increase government spending on infrastructure by $300 million, decrease spending on education by $100 million, and reduce income tax rates by 0.5%. The effects of fiscal policy in the simulated year of 2xx6 shrank the unemployment rate from 6.32% to 4.62% and improved popularity from a score of 3.2 to 3.68. For this scenario, the changes in fiscal policy brought positive results to the economy of Erehwon.
The first scenario begins with the announcement of an inflationary problem in the economy. The scenario specifically states, "In the fourth year of office it has been decided to use fiscal policy measures to bring inflation down, which means reducing incomes in the economy." I decided to cut government spending on education by $600 million and increased the income tax rate by 1%. These measures resulted in an increase in tax revenues by $200 million, a reduced budget deficit by 2.1% of GDP, a sustainable GDP that is close to the long-run potential output. Inflation, the main priority, was reduced due to lower price levels in the economy. In an effort to reduce the inflation rate, I had to trade off with an increase in unemployment. According to the simulation, I could have managed my popularity better since my fiscal policies consequentially caused the popularity score to drop from 3.68 in the first simulation to 3.45 in the second.
The second scenario asks, "Which components of fiscal policy will you use to fight recession?" In answer to the posed question, I increased the federal spending for education by $200 million and decreased the income tax rate by 0.
Mikesell, J. L. (2010). Fiscal administration: Analysis and applications for the public sector (8th ed.: 2010 custom edition). Mason, OH: Cengage Learning
Macropoland, a natural gas and oil importer, has a natural rate of unemployment of about 4.5% and a long run average rate of inflation of about 2%. However, there are two specific time periods where these rates fell below their potential. During the period between 1973-1974, the country had an inflation rate of about 15%, with an unemployment rate of nearly 13%. And now, they are experiencing an unemployment rate of 9% and an inflation rate of 0.4%. As their new economic advisor, it is my job to explain these two time periods.
The country needs to start monitoring how the government is spending the federal budget and they need to start splitting it fairly to benefit our country. 83% of the federal budget is spent on the Big Five which are the main expenses in the budget. We have to stop spending it all on the Big Five. Our government should really pay attention to what we need most of in this country and focus on the needs. The government needs to take away 20% of the Big Five and split it to categories that need it.
With the new 2014 to 2015 budget now in place, the changes that have been made will dramatically affect future government decisions when concerned with fiscal policy. In reference to the budget, they will need to rethink their expenditure, they will have to recalculate the tax needed to keep inflation steady, to bring the levels of unemployment down, to keep external balance solid and to keep the GDP under control.
Government spending has become a hot topic of debate after economic recession of 2008 but it’s still a controversy among the economists. Some economists favor role of government in the economy for balance of economic shocks, whereas others consider that government generate shocks and instability in economy. Keynes was first who introduced government involvement in economy after the recession of 1930. Theories of Keynes regarding the government spending have again taken attention in the financial crisis of 2008 in America, which has spread all over the world through trade openness. This financial crisis has decreased the economic growth and employment rate in whole world especially in the developed countries. Thus some economist suggests that
During the six years from 1958 through 1963, the unemployment rate averaged almost 6%. Prior to this ten years before it had been 2%. Kennedy’s Council of Economic Advisors proposed a policy designed to stimulate the economy and bring the unemployment rate down to 4%. At this time, it was believed that 4% was a consistent measure with “full employment.” The policy called for a major tax cut. Those who opposed the cut argued that it would be fiscally irresponsible and could lead to a deficit, with the government spending more than it received in taxes. They contended that inflation would rise and the cost of lower unemployment would be higher inflation. The government would need to decide how much inflation it was willing to tolerate to get unemployment down.
Economics primarily focuses on how laws and government policies impact the economy. Much of this looks at taxes specifically and more generally the public finance, which includes the spending and borrowing the government does. The root word of economics is economy. Economy comes from the Greek oikos - home and nomos - managing. (Dkosopedia, 2006) Economy can be described as the current soundness of financial indicators such as jobs and job growth, economic productivity and output, and can also be measured by a vast range of other factors such as the trade deficit, national debt, GDP, and unemployment rates. In this paper, the effects of the monetary policy on macroeconomics, GDP, unemployment, inflation and interest rates will be discussed. Throughout the paper explanations of how money is created will be given along with discussing what monetary policies combination will achieve the goal of economic growth, low inflation, and a reasonable rate of unemployment, what combination of monetary policies will better accomplish this goal.
Before the government can spend any money, it must first acquire that money. A government’s two options is either to increase taxes or to redistribute money from within, from one department to another. Of course, it’s also possible to simply print more money, but that will inflate the dollar and is definitely not the correct way to increase a budget (Ahlseen). Either way, money must be borrowed from somewhere else, either from the population or from the economy. When that money is later reinjected into the economy, its effects are not immediate. Instead, it has negative immediate effects on the taxes, the population’s incentive to invest and the private sector. It has been established that taxes must be increased to provide the government with more spending money. As a r...
...the recipients of these tax cuts may not spend the money. The tax cut may though increase the wealth of recipients but they may not spend money due to low marginal propensity to consume. The recipient of the tax cut may decide to save the extra amount of money rather than spending it. Without the expenditure there will be no income generated so this may not simulate the growth of entire economy.
Difficulties in Formulating Macroeconomic Policy Policy makers try to influence the behaviour of broad economic aggregates in order to improve the performance of the economy. The main macroeconomic objectives of policy are: a high and relatively stable level of employment; a stable general price level; a growing level of real income (economic growth); balance of payments equilibrium, and certain distributional aims. This essay will go through what these difficulties are and examine how these difficulties affect the policy maker when they attempt to formulate macroeconomic policy. It is difficult to provide a single decisive factor for policy evaluation as a change in political and/or economic circumstances may result in declared objectives being changed or reversed. Economists can give advice on the feasibility and desirability of policies designed to attain the ultimate targets, however, the ultimate responsibility lies with the policy maker.
Inflation and unemployment are two key elements when evaluating a whole economy, and it is also easy to get those figures from the National Bureau of Statistics when you want to evaluate them. However, the relationship between them is a controversial topic, which has been debated by economists for decades. From some famous economists such as Paul Samuelson, Milton Freidman, etc. to some infamous economists, this topic received a lot of attention. However, it is this debate that makes the thinking about it evolve. In this essay, the controversial topic will be discussed by viewing different economists’ opinions on the subject according to time sequencing.
The Social Studies Help Center (n.d.). Monetary and Fiscal Policy. Retrieved November 5, 2011, from http://www.socialstudieshelp.com/eco_mon_and_fiscal.htm
Conclusively, all of the policies discussed have both advantageous and disadvantageous affects, and so there currently is no definite answer to the problem. Inflation can be reduced; however doing so would sacrifice the fragile recovery of the British economy. The government must therefore decide which process is more important for the long-term health of the British economy, and decide on the policies that will best improve either situation. Either way, living standards are set to fall, and real income will also decrease in the foreseeable future.
Fiscal Policy consists of changes in government expenditures and/or taxes to achieve economic goals, such as low unemployment, price stability, and economic growth. There are two types of policies used by the government. These policies include expansionary and contractionary. There also the Keynesian economists as well the Classical economists. Each of these economists have different views on the fiscal policy. Some see the fiscal policy as ineffective and others effective. The government uses fiscal policies for various reasons. There are many scenarios in which countries such as Japan and even the US has use this policy. It may be used for unemployment rates or even to help a country that
These two policies use to try to shorten recessions. Fiscal policy has its initial impact in the goods markets, then monetary policy has its initial impact mainly in the assets markets, which both effect on both level of output and interest rates. (R. Dornbusch et al., 2008)