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The Role of Government in American Economy
Roles of the US Government in the US Economy Essay
the role of government in the us economy
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This statistical summary shows that the US GDP responds to the four basic instruments of the domestic economic policy: the fiscal policy (FE), the foreign relations policy (ER), the income distribution policy (MW) and the monetary policy, both directly through the public debt (D) with negative sign and indirectly through the credit (DEBTS) with a positive sign. It was also found that, as theoretically expected, the exchange rate ER and the minimum wage MW are more effective in displacing the aggregate demand than shifting the aggregate supply for an increase in ER or MW leads to a greater GDP. Dollar devaluation and higher minimum wage cause GDP to grow. Collecting the coefficients for each explanatory variable it comes about the theoretical equilibrium equation for the US GDP, a hypothetical situation in which the GDP would be in a theoretical state of equilibrium: GDPe = -473.109 + 2.39936*FE + 569.291*MW + 5.67532*ER – 0.242064*D + + 0.245723*DEBTS The coefficient for the fiscal policy (≈2.4) in the GDPe equation is the Keynesian multiplier for this sample. It means that ceteris paribus MW, ER, D and DEBTS, a fiscal expenses expansion of US$ 1 billion does not touch the aggregate supply curve and leads to an aggregate demand shift such that at the new theoretical equilibrium point the US GDP would initially be US$ 2.4 billion larger. Vice versa, a reduction of 1 US$ billion in the fiscal expenses would cause a GDP initial loss of US$ 2.4 billion. Primary surpluses cause recession and unemployment. The coefficient of each explanatory variable depends not only upon its time performance vis-à-vis the time performance of the endogenous variable; it depends also on the time performance of all other explanatory variables thus making ... ... middle of paper ... ...ger a continuous process of a GDP sound expansion the interest rate should be reduced indefinitely even after crossing the zero line, but then it would no longer be a monetary policy but a fiscal policy. Works Cited BAIMAN, Ron and Mel Rothenberg (2007). Rentier-Based Finance-Led Macroeconomies: Keynesian or Classical in the Short-run, but Unsustainably Debt Dependent and Minskyan in the Long-run. Chicago Political Economy Group Working Paper 2007-1. http://www.cpegonline.org/workingpapers/CPEGWP2007-1.pdf. BALKE, Nathan S. and Kenneth M. Emery (1994). Understanding the Price Puzzle. Economic Review of The Federal Reserve Bank of Dallas, Fourth Quarter. http://www.dallasfed.org/assets/documents/research/er/1994/er9404b.pdf. COURNOT, Antoine August (1838). Recherche sur les Principes Mathématiques de la Théorie des Richesses”. Paris: Marcel Rivière, 1938 edition.
The Classical economists believe that these are “temporary” changes that will correct themselves in the long run. They feel that an economy will always tend towards operating at its potential output (as given by the long-run aggregate supply curve. Nothing needs to be done by the government because normal market forces will serve to self-correct these issues. On the other hand, Keynesian economics argue that the gap between the lower and the potential levels of output is due to a change in aggregate demand. They argue that this gap can exist for a long time and that the gap can be pushed to close faster if the government enacts fiscal and monetary policies. There are differences in how each policy works to close the recessionary gap caused by a drop in aggregate
Two very important economic policies that point in different directions of fiscal policy include the Keynesian economics and Supply Side economics. They are opposites on the economic policy field and were introduced in the 20th century, but are known for their influence on the economy in the United States both were being used to try and help the economy during the Great Depression.
Fiscal Policy is described as changing the taxing and spending of the federal government for purposes of expanding or contracting the level of aggregate demand; these are designed to increase short-run economic growth. In a recession, an expansionary fiscal policy involves lowering taxes and increasing government spending. By cutting taxes, increasing government spending programs, and increasing transfer payments, more money is in the economy, more income, and more spending. This can be done through the federal budget process; however, the problem with fiscal policy is lag time. This process can take so long (as long as a year or more) that Discretionary Fiscal Policy is very rarely used in the federal governmen...
Everyone has their own political leaning and that leaning comes from one’s opinion about the Government. Peoples’ opinions are formed by what the parties say they will and will not do, the amounts they want spend and what they want to save. In macroeconomic terms, what the government spends is known as fiscal policy. Fiscal policy is the use of taxation and government spending for the purposes of stimulating or slowing down growth in an economy. Fiscal policy can be used for expansionary reasons, which is aimed at growing the economy and increasing employment, or contractionary which is intended to slow the growth of an economy. Expansionary fiscal policy features increased government spending and decreases in the tax rates as where contractionary policy focuses on lowering government spending and increasing tax rates. It must be understood that fiscal policy is meant to help the economy, although some negative results may arise.
J.M. Keynes context is based on spending and demand the causes of the components of spending, the liquidity preference theory of short run interest rates, and the requirement that government make strategic but powerful interventions in the economy to keep it on an even keel and avoid extremes of depression and overexcited excess. His theory was one of employment, interest and money. Keynes saw himself as the enemy of laissez f...
The suggested fiscal policy to fix the issues of a trade-cycle recession is expansionary fiscal policy. This involves larger government purchases, a reduction in taxes, or an escalation in transfer payments. This fiscal policy substitute is intended to stimulate the economy by increasing aggregate expenditures and aggregate demand. It is primarily aimed at reducing unemployment, which is beneficial to the economy and the government.
Fiscal policy uses changes in taxes and government spending to affect overall spending and stabilize the economy. When lowering taxes the people have more to spend then the government decreases spending and the economy slows down therefore the economy stabilizes. The objective of fiscal policy is the governments’ typical use fiscal policy to promote strong and sustainable growth and reduce poverty. 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.
When an economy is in a recession the government has to act differently in order to increase demand and help businesses survive. The money supply method of the monetary policy is a good idea in theory but because of the current economic crisis, banks don’t feel secure enough to lend out there money as the return isn’t guaranteed.
“The goal is an equilibrium level of national income that generates full employment with price stability”. (Amacher & Rate, 2012 pg. 9.2) During a recession, the government can use an expansionary fiscal policy to fill the recessionary gap, influencing the aggregate curve to the right. A recessionary gap happens when the economy is operating under full unemployment. When the economy is going through a recession; net exports, individual incomes, and investments will decrease affecting our GDP. President Barack Obama used an expansionary fiscal policy by enacting the Economics Stimulus Act during the Great Recession. If the government wants the opposite effect, it would implement a contractionary monetary policy, which slows down the economy. An economy is slowed down by reducing the money supply. The Federal Reserve contracts the money supply by selling bonds through market operations, meaning the public market. When bonds are sold, interest is collected by the central bank which has an effect on the price of goods and services (Inflation). The Federal Reserve can also affect the money supply by adjusting interest rates which will affect borrowing, consumption, and investments. If the Federal Reserve wants to expand the money supply it will purchase government bonds. This will cause interest rates to fall resulting in an increase in investments and borrowing
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
One of the tools of Keynesian approach is to adopt expansionary fiscal policy to increase economic activity within economy. Expansionary fiscal policy aims to cut taxes and increase government spend...
However, several weaknesses exist from this economic viewpoint. This economic school of thought has only a short run focus and does not take into consideration the long-term effect immediate decisions may have on the economy. It only focuses on the economy from a macro level and ignores microeconomic factors, such as market sectors or labor issues, that can effect the national economy. Keynesian places too much emphasis on the multiplier and ignores potential crowding out effects due to increased government
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
It is difficult for government to achieve all the macroeconomics objectives at the same time. Conflicts between macroeconomics objectives means a policy irritating aggregate demand may reduce unemployment in the short term but launch a period of higher inflation and exacerbate the current account of the balance of payments which can also dividend into main objectives and additional objectives (N. T. Macdonald,
In economics, the fiscal multiplier is the ratio of a change in GDP due to change in government spending. When this multiplier exceeds one, the enhanced effect on GDP is called the multiplier effect. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased consumption, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in GDP greater than the increase in government spending.