Evaluating Fiscal Policy Alternatives Simulation ECO 372 November 28, 2011 Matthew Angner A government has a couple of roles the need to enforce in order to ensure that their people and land will be able to support them through any times. One of these roles is to invoke and sustain economic growth. The government can achieve this by trying to manipulate the trends in that particular economy, though fiscal policy. Fiscal policy is changes that are made to government spending or taxes that leads to one of two conclusions. One of these conclusions is that the economy will stimulate because of the changes being made, or the economy will slow down.
As the Reserve increases interest rates, it effectively lowers the demand for money. Increasing the interest rates would be in the Reserves best interest when the nation is experiencing rising inflation. This type of monetary policy is called contractionary monetary policy (Hubbart, 869). On the other hand, to increase demand for money the Reserve can decrease the interest rate. Decreasing the interest rate effectively increases consumer and businesses consumption.
Lower reserve requirements will result in more funds being available to loan out. This should, in turn, increase the rate of economic growth. Conversely, a higher reserve requirement will reduce the availability of funds and should slow economic growth. In this case, we need to increase our rate of economic growth in response to the recession, so I choose to lower the reserve requirement. The reason I would make this choice is to stimulate lending to businesses, reduce unemployment and increase household income so that the economy could then recover naturally.
ECO/372 Learning Team Aggregate Demand and Supply Models The Keynesian economists would look at the current proposal of increasing taxes as a governmental expression of the intermediate approach to the economy. The government taking control and having the people pay the price for their higher tax bracket. These funds would be used to decrease the amount of money owed by the United States. The effects of the economy would be absorbed and educated responses would be to lessen those impacts. To increase their taxes would be appropriate and this would be stream lining taxes at a time when the economy needs a boost.
Proponents of the notion of a "political business cycle" suggest that: A. The standardized budget is a better indicator of the state of the economy than the actual budget B. Cyclical swings in the economy are produced by the inherent instability found in capitalist economies C. A possible cause of economic fluctuations is due to the use of fiscal policy for political purposes D. There is a tradeoff among goals that tends to make the economic policies of state and local governments procyclical 19. One of the timing problems with fiscal policy is an "operational lag" that occurs between the: A. Beginning of a recession and the time that it is recognized that the event is occurring B.
“The net export effect of expansionary monetary policy will be in the same direction as the monetary policy effect”.1 Recommended Course of Action Although both fiscal policy and monetary policy prove to have beneficial effects on an economy during a contractionary period, we believe that the government should use a combination of both policies…… - The money supply may be ineffective, but in the end people want to make sure that they will have money to save up in case of emergencies. There is no change in investment spending meaning little change in aggregate demand. - Further to this, the fiscal policy may be ineffective, as the extensive “time lags” may dig us deeper, creating a depression. - To what extent?? ?
Why do Keynesian economists believe market forces do not automatically adjust for unemployment and inflation? What is their solution for stabilizing economic fluctuations? Why do they believe changes in government spending affect the economy differently than changes in income taxes? Keynes theorized that when unemployment raises the amount of goods that are in demand by countries citizens decreases and as these demands decrease the amount of output by the countries manufactures also decreases. As the demand for one product decreases it can cause a chain reaction lowering the demand for products needed to produce the first product.
Monetary policy is the use of interest rates to manipulate the level of aggregate demand in the economy and loose (expansionary) monetary policy is a reduction in the interest rates. This will result in an injection of extra consumption because it is cheaper to borrow money on credit cards and therefore allowing consumers to spend more which will cause an increase in aggregate demand (AD). Additionally, extra consumption will allow shops to gain more profit preventing “business failures.” Furthermore, mortgages will be cheaper and therefore consumers feel richer and there will an extra injection of consumption. AD will also increase due to an increase in investment, causing an increase in aggregate demand from AD1 to AD2 as shown below. However,
Many economists believe “that a rapid stock of the nation’s money causes inflation” (pg.169). The rate of inflation can affect borrowing power for a new business owner as, “the rate of inflation expected by the borrower and the lender will be influence by various interest rates” (pg. 169). When inflation is high, many lenders interest rate increase to compensate for the impact inflation has on their business and the decrease in purchasing power of money that has to be paid back in the future. Since, the FED set the interest rate in which the banks borrow from, Edgars’ ability to borrow enough money or establish a line of credit to start his business will be affected by inflation, interest rate and financial policies.
To stop hyperinflation a government needs to restore confidence in the countries budget system and balance their budget. They will need to stabilize the currency in the country by raising interest rates and stop printing money. In worse cases they may need to introduce a new monetary system which would create new currency with a stronger backing. Increasing the interest rates will make it harder to borrow money and this will increase its value. Very importantly they will need to implement a system to accurately measure and track inflation so they can halt the growth of the money