Secondly high taxes create disincentives to work and this can be analysed through income and substitution effects. The substitute for work is leisure time and when taxes increase the opportunity cost for leisure time decreases, also people will have to work longer hours to earn the same post tax income causing disincentives as it reduces living standards as people must work longer and harder for the same incomes. This will create disincentives to work and so lead to a reduction in the labour force meaning less people in jobs and so less people paying income tax. Also as people earn less this way consumption in the economy falls therefore reducing the governments VAT recipts and corporate tax revenues and businesses make lower profits. This will lead to increases in the fiscal deficits as the government earns less and may be spending more in forms of social protection i.e.
Inflation damages businesses because it causes uncertainly. A rise in the rate of inflation might reflect a rise in the cost they have to pay; for example: * Employees will want more wages * Costs of materials may go up * Cost of fuel and energy may also rise. These rising cost will eat into the business profit. This keeps businesses to then have a choice to either keep prices constant or to see profits fall or raise to raise prices and perhaps lose out on competitors. The
The federal government attempted to fix the economic problems through costly economic stimulus packages, which only resulted in further national debt. So one would have to ask if the fiscal policy the government is currently using is working. Many economist say America is suffering from debt deflation. Americans are trying to pay down debt by spending less, but this is causing their debt problems to worsen. Economists believe that government spending should rise temporarily so the drop in private spending can repair itself.
When there is a larger demand for more expensive commodities, the demand for money increases and the cost to borrow follows. This is following the theory of money demand. (Sparknotes, 2013) It is true for a decrease in output. The fewer consumers are willing to buy, the lower the demand of money is creating lower interest rates. This can be seen in the housing market.
P1 P2 Y2 Y1 Real GDP AD AD2 Another reason why aggregate demand would fall due to a loss in consumer spending is due to the disposable income, as there will be cuts in public expenditure it is most likely that there will be cuts on welfare benefits so consumers will start to save more instead of spend. Similarly, as consumer spending which adds to aggregate demand, if it were to fall then the aggregate demand is likely to decrease and following on from this it also effects investments. As aggregate demand falls businesses will be less confident with their investments,
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.
(This is why people say the Fed prints money.) The Federal Reserve can restrict credit by raising interest rates and making credit more expensive. This reduces the money supply, which curbs inflation. Why is managing inflation so important? Ongoing inflation is like an insidious cancer that destroys any benefits of
Our money supply affects the country’s economy, interest rates, and borrowing. Erratic increase or decrease in prices of commodities of other items, if continued unabated for a substantial period, can be a source of imbalance in the economy. Why it is important to increase economic growth? It is important to increase economic growth to keep the economy moving forward to prevent job losses, and business closures, which in return you will have, a low money supply. My rationale for the Reserve Requirements would be by lowering the reserve requirements, and the banks will be able to have more money to loan, and then increasing the money supply.
The government is significantly influential because if interest rates, VAT and inflation rates were to increase it will mean the consumers disposable income in the UK decreases. This is because, the cost of living will increase and more tax will be paid for each purchase. As a result, consumption will decrease. This leads to a decrease in aggregate demand as consumption makes up approximately 60% of AD. Consequently, consumer confidence will fall which means that a smaller amount of purchases will occur.
The factors which contribute to a recession and sometimes a depression are: increase in cost of production, higher costs of energy, and the national debt among many others. This means people and companies alike will tend to cut spending, which by chain reaction will cause the unemployment rates to increase and the GDP to