economic health memo Essay

397 WordsMar 21, 20092 Pages
Fluctuation in the economy is referred to as the business cycle. When the real GDP is rising, business is very good. When the real GDP is falling, businesses are in trouble. The real GDP measures the amount of goods and services produced in a certain time period and the total income of everyone in the economy. When the economy is bad, much of the decline is in conjunction with the reduction in spending. Fiscal policy refers to the government’s choices regarding the overall level of government purchases or taxes. Policymakers use the tools of monetary and fiscal policy to influence the aggregate demand. The Fed alters the money supply by changing the amount in reserves through the buying and selling of government bonds. When there is an increase in the money supply it shows that government spending is increased as well with lower unemployment rate and higher inflation. When the money supply is decreased there is less of government spending, increase in taxes, higher inflation and lower unemployment. “If monetary and fiscal policymakers expand aggregate demand and move the economy up along the short-run aggregate-supply curve, they can expand output and lower unemployment for a while, but only at the cost of a more rapidly rising price level. If policymakers contract aggregate demand and move the economy down the short-run aggregate-supply curve, they can lower inflation, but only at the cost of temporarily lower output and higher unemployment.” (Mankiw 2009) At the present moment in our economy, it appears that the government is spending less money. Inflation is high, but unemployment is high as well. Gas and food prices have sky rocketed over the past year. People are not spending money the way they used to. People are not shopping, making big purchases or taking as many vacations either. Most people are saving more, spending less. Many are afraid that with

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