There are two types of Fiscal policy put in place to alter the level of aggregate demand; Expansionary fiscal policy and Contractionary fiscal policy. When an economy is in a recession, expansionary fiscal policy is in order. Typically this type of fiscal policy results in increased government spending and/ or lower taxes. A recession results in a recessionary gap meaning that aggregate demand is at a level lower than it would be in a full employment situation. In order to close this gap, a government will typically increase their spending which will directly increase the aggregate demand curve (since government spending creates demand for goods and services).
When the demand for U.S. dollars increases, the value of the dollar will increase or appreciate (Stone 2008, pp. 685). As a result, U.S. products become more expensive for foriegners causing a reduction in exports and increasing imports. This not only effects the U.S. economy, but also affects the economies in other countries. Monetary policies influence and are influenced by international developments, including exchange rates, and based on these market conditions the U.S. government can make strategic changes to these policies to maintain the country’s economic stability (full employment, stable growth and price stability).
Demand side policies are those that manipulate the level of aggregate demand (AD) to achieve one or more economic objective. The policies can be fiscal policies (changes in government spending and/or taxation), or they might be monetary policies (which are largely changes in the short-term rate of interest). The four major macroeconomic objectives are a sustainable level of economic growth; low inflation; low unemployment; and a medium term balance on current account. Recently the government have used loose fiscal policy and the MPC have reduced the rate of interest. These are designed to increase the level of AD and increase in national income.
There are several ways in which changes in interest rates influence aggregate demand, one of the main changes are through the housing market & house prices. For example higher interest rates increase the cost of mortgages and eventually reduce the demand for most types of housing. This will slow down the growth of household wealth and put a squeeze on equity withdrawal (consumers borrowing off the back of rising house prices) which adds directly to consumer spending and can fuel inflation. Another situation where the monetary policy increases AD is through disposable incomes of mortgage payers. For example, if interest rates increase, the income of homeowners who have variable-rate mortgages will fall – leading to a decline in their effective purchasing power.
A huge national debt has no effect on the money market. The fed has the ability to decrease interest rates, which could cause spending to increase. (Schiller) This ultimately increases the money supply and allows for more circulation in the economy, from which the economy can prosper. With a prospering market, taxes can be increased in order to stimulate the economy and prevent the money supply from surpassing equilibrium and reaching inflation. The revenue from these taxes can
Ultimately this is used to illicit a raise in GDP levels (Fiscal Policy). 3. An example of this would have been Obama’s Economic stimulus package. This is an expansionary policy as it pulls from money we may not even have as a country in order to avoid a serious collapse due to the population being cautious with their income causing a stall in the economic growth of the country. Therefore, with an economic stimulus package, people were more willing to spend their money (possibly even more than the stimulus was) and take out loans which all raise the GDP for the country as well as improve investor confidence in the market as a whole (Eaton, G.).
The first phase is expansion when the economy is growing along its long term trends in employment, output, and income. Eventually the economy will overheat, and experience a rise in prices and interest rates, until it reaches a turning point called the peak, phase two. It will then turn downward into a recession which is the third phase of the cycle. Recessions are usually marked by falling employment, output, income, prices, and interest rates. Most importantly, recessions are marked by rising unemployment.
The following are the equations of the IS-LM model, here including a feature that taxes are not simply given but depend on income through a tax function, T(Y). IS Curve Y = C(Y - T(Y)) + 1® + G LM Curve: M /P + L(r,Y) a. The Fed Funds rate was near zero in 2010. At such low interest rates, it would presume that the economy will be stimulated and promote economic growth. It appears not to be the case.
Dichele Parker Introduction to Business Controversial Issue Project – Does Government Spending Help Alleviate Our Recession? From the research I have done my theory is that the government not only can help, but can alleviate the current recession we are in. In the course of a recession, a government can try to increase economic growth, employment and motivate the economy by spending the taxpayer’s money on government plans. This approach is based on Keynesian economics, famously utilized in Franklin Roosevelt’s New Deal in 1937 during the great depression, and now resurfacing in the eye of our global crisis. Economic growth is defined as the increase in the quality and quantity of goods and services, which results in hundreds of thousands of entrepreneurs hiring more workers, presenting technological innovations and improving worker productivity.
Government spending consists of salaries for government employees, defense spending, aid programs, and other cash outflows. Government revenue primarily consists of taxes. When the government spends more than they receive in the form of revenue, a budget deficit occurs. The causes and the implications for long-term economic growth due to a high budget deficit on the economy, along with the role that fiscal and monetary policy plays, will be defined and explained. The development of a increasing budget deficit has been caused by a weak economy and the result of increased government spending in areas such as health care, education, defense spending, low interest rates, lowering taxes, and the increase in welfare and entitlement programs.