From nominal and real rates there are also lowered and raised rates. When the interest rate is lowered consumer spending grows while savings decrease. Spending on items such as housing becomes one of the ways the AD rises. Though AD rises it pulls the economy out lack of spending, but puts the economy into the possibility of inflation. Differentiating from low rates, high rates stop inflation but creates the possibility of recession.
The question I hope to answer in the paper is does government spending have a correlating impact of the poverty rate of a country and is it positive or negative one. Government spending plays an important role in poverty reduction. In economics according to the Keynesian approach, public spending may increase the aggregate demand which additionally fuels the economic growth and employment. While increase in government spending may leads to fiscal deficit, if the government decreased their spending it may adversely affect the economy. Fiscal deficit can be dangerous to welfare for numerous reasons including, it can lead to wasteful distribution of resources.
According to Macroeconomics, Congress can only raise taxes so much before consumer spending declines sharply (Colander, 2010). Members of Congress realize that by reducing expenses they can fix the structural portion of the spending deficit without harming aggregate demand. During a bu... ... middle of paper ... ...ng increases cash flow to the economy. Continued deficit spending can continue to add to the national debt as it reduces the ability to save. A surplus means that the government is borrowing less than it is spending which can reduce the national debt.
To explain the IS curve in a better way, we take the example of the government, if the government decides to spend more on government spending and cut taxes for lower salary earners, than consumers ... ... middle of paper ... ...not in the short-run, that why FED lets the economy to boost when there is inflation in the short term. The problem economists are afraid is that in the long-run inflation will go out of control, so no Central banks or even not the government can do a thing against it. During inflation it’s hard for Central banks and politicians to estimate when they should react. Since in the United States the government is looking for more and more economy, the Federal Reserve Bank has in somehow a double task to do, in one hand the inflation shouldn’t that big that people aren’t able to consume anymore and on the other hand the economy should be stopped by reducing the inflation. Reference: http://www.ecb.int/mopo/html/index.en.html http://www.house.gov/jec/fed/fed/fed-impt.htm http://en.wikipedia.org/wiki/Money_creation http://en.wikipedia.org/wiki/Interest_rate
Fiscal policy is the discretional changes to government expenditures or taxes to achieve national economic goals. When there are certain economic crises, the government has to make changes to how it spends government money to decrease deficit and eliminate inflationary and recessionary gaps by increasing or decreasing aggregate demand. Raising, or lowering, taxes are also a major factor in the fiscal policy. Raising taxes gives more money to the government, but decreases consumption, investment, and net exports by individuals, foreign country residents and firms (Text, p. 278 -279). The main goal of fiscal policy is to generate economic growth and maintain the nation’s stability.
During periods of recession congress has the option to decrease taxes to give households more disposable income so they can buy more products. Therefore, lowering tax rates increases GDP. The steady growth of inflation in 2007 and 2008 suggest that the Federal Reserve applied discretionary powers to avoid tightening. Tightening is inflation growing too fast. In 2009 the feds needed to be concerned about the deflation because the average inflation rate dropped to -.4%.
The government cannot keep this up without creating more debt. It’s the same as budgeting your personal accounts by getting a new credit card or loan to consolidate old debt and then re-use your old cards. You end up digging yourself in a deeper hole in the long run. Another reason might be that due to the growing unemployment rate, there are less taxes being paid to pay our nations bills or to put back into the economy. “Expansionary fiscal policy is when spending is higher than the revenue or the budget is in deficit.
This would lead to other countries to lose faith in the dollar resulting in loss or trade and investors. The dollar will be worth less and less if nation is in high debt. People will also be affected, when you have less money you spend and buy less due to increased prices which can causes problems in the economy such as a recession or worse a depression. Budget Deficit calls for the government to let cost exceed national income and use of monetary policy to jump start the economy. The government must be careful when choosing the best way to build the economy up.
This was seen in the housing market when adjustable mortgage rates went up. People could not afford their payments any longer and their homes went into foreclosure. This drove home values down, which lowered homeowners’ equity against which they could borrow, causing panic and a dramatic decrease in spending. Unemployment can also be directly affected by the Federal Reserve. If the Federal rate goes up, there will be less spending which ... ... middle of paper ... ...ll have some immediate consequences on the economy, but I believe that these will even out in the short term as our country begins to get back on its feet.
Lower taxes will increase consumers spending because they have more disposable income. This will worsen the govt budget deficit. The other method is Deflationary fiscal policy this involves decreasing AD therefore the government will cut their spending and or increase taxes. Higher taxes will reduce consumer spending. This will lead to an improvement in the government’s budget deficit.