The reduction in the money supply restricts liquidity and slows down economic growth. In conclusion, monetary expansion will cause a rise in output, prices and interest rates with a decrease in unemployment rates in the short run. However in the long run, output and interest rates will see no significant change whilst price levels and incomes will continue to rise.
(Greene, 2006) It's also believed that if the US continues to trade freely with the overseas countries then the powerful drag of their far lower wages will begin dragging down American's average wages. (Greene, 2006) Economist has found that tax cuts offered to large manufactures have caused productivity to go up. The manufactures are actually given tax breaks to be able to purchase more machinery to do the jobs and therefore fewer laborers are needed, causing a large number of workers to be displaced. The tax act that was initiated by Bush administration for big businesses was the "bonus depreciation". Under this act the more the companies spend on equipment the less the tax they have to pay.
National income is the value of goods and services earned by a country in a period of time. The country’s income can be measured in 3 different measures which are GDP (gross domestic product), GNP (gross national product) and NNI net national income).Gross domestic product is the total value of all the final goods and services produced in an economy in a year. It is algebraically expressed as GDP=C+ I + G + (X-M). Gross national product/ gross national income is the total income that is earned by a country’s factor of production regardless of where the assets are located, GNP = GDP + net property income from abroad). The income earned from assets minus income paid to foreign assets to foreign operating domestically is known as net property income from abroad.
Wealth is drained from the economy for unproductive purposes and economic growth slows down as there are fewer funds for infrastructural development. Also, employment creation for a high percentage of unemployed population becomes challenging. Circular flow of income is the lifeline of a flourishing economy. Unemployment slows down this flow by the lack of money inflow and outflow. When money is not pumping into the economy, its growth becomes sluggish.
When inflation (means the increase in prices of goods and services) increase the value of currency decreases. It has a worst effect on consumers, when high prices of day-to-day goods would be difficult for consumers to buy daily life commodities. This makes the consumers to think for high incomes so government always
In macroeconomics , equilibrium in the economy will occur when the aggregate planned demand for goods and services equals the aggregate supply of these products (Gillespie, 2011). To analyse how equilibrium occurs in an economy, first can be used the circular flow of income which shows how income flows through the economy between firms and households: Figure
They are influenced by monetary policy; when demand weakens, the fed lowers interest rates, which in turn stimulates the economy, by allowing the consumer to spend more and the industry to produce thus job retention is good. In contrast, continuous stimulus to increase salary or if demands falls, productivity will decrease, jobs are lost and this will push the economy's inflation higher. The Fed just tries to smooth out the bumps of natural business cycle. Inflation is an economy wide rise in prices which is bad because it makes it hard to tell if a business product price is going up because of higher demand or inflation. Inflation also adds premium to long-term interest rates.
National Income includes all payments to resources such as rent, wages etc. The National Accounts are a statistical record of economic activity in the economy and are produced by the Central Statistics Office, and annually assess National Income and
Rather, cuts in taxes should be directed toward the wealthy and business to induce savings and investments.” (Introduction to Business, Government, and Society, Page 83) This resulted an increase in poverty. Therefore, the tax policy compared to Keynesian is not successful because it enhanced inequality by making the rich “richer”.
Eventually, this will cause an increase in the inflation due to the adjustment that people have made. The short run is less predictable using this method due to the lack of time that people have to adjust for the inflation rates (Gwartney et al., 311). One of the major critics of this equation came shortly after Fisher; his name was John Keynes. He protested against the idea that the velocity was a constant in the equation. Just because inflation occurs does not mean that people will begin to spend more money.