First, if the government increases its purchases but keeps taxes constant, it increases demand directly. Second, if the government cuts taxes or increases transfer payments, households’ disposable income rises, and they will spend more on consumption. This rise in consumption will in turn raise aggregate demand” (Weil, 2008, para. 4). Consumer income has a huge effect on aggregate supply and demand just as the aggregate supply and demand can affect consumer income.
This method of fiscal policy will stimulate economic activity and directly cause economic growth. (AD/AS diagram, with AD shifting outwards and a caption “the effect of cutting interest rates”) Secondly, the use of monetary policy can be utilized to aid fiscal policy in demand management of the economy A cut in the rate of interest raises peoples disposable income, due to lower mortgage and loan repayments, allowing them to spend more. This will raise consumption, and therefore aggregate demand. The effect of an increase in AD is an increase in real GDP – the total output of an economy – raising living standards through higher choice of goods and services to fulfill needs and wants. However, since the power of
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
As situations happen around the world the internal economy is being affected, the price of oil increases and more money in the market should be created, but this will affect the inflation, as more money is in the market, the GDP keep growing and the unemployment is decreasing. To balance the economic growth, lower the inflation, and make a reasonable rate of unemployment it is important to take in consideration that typically if money is released into the system the real Gross Domestic Product will increase, creating opportunities of work and decreasing the unemployment rate. After indentifying the tools used for the Federal Reserve and analyzing the influence this has with the money supply the Feds can add or take money into the system to control the levels of inflation, increase the Gross Domestic Product and reduce the
Balance of payments is the difference in total value between payments into and out of a country over a given period. An appreciation means an increase in the value of a currency, and is worth more in terms of foreign currency. One impact of an appreciation on the current account is that exports are more expensive, so there is a fall in exports. Imports are cheaper so imports increase, creating a bigger deficit on the current account. This means that a strong real may lead to a worsening of the balance of trade – much depends on the value of price elasticity of demand for imports and exports.
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.
Another, way to establish growth in the future would be to use budget deficit as a tool or demand management. In the UK and in other federal government’s borrowing is used as a way of managing the aggregate demand. Increase in borrowing can be a stimulus to demand as the other sectors are suffering from the weakness of spending. Keeping a higher level of demand will help with sustaining growth and help to keep unemployment rate
Contrast the pros and cons of protectionist policies. A: Governments utilize protectionist economic policies to restrict imports and exports. Protectionism helps to protect nations from an increase in the amount of imports, which could affect domestic production. One of the most common protectionist policies includes raising the price of imports via tariffs, keeping industry in the nation more competitive in the domestic market. Protectionism can also include import quotas, or the restrictions on the quantity of imports allowed to enter a country.
Many republicans say that raising the minimum wage of Americans will also cause inflation to rise, sending the country back into a recession. Kruger states that when President Bill Clinton was in office and raised the minimum wage, that it actually boosted consumer spending and the economy. There is evidence that suggests that Kruger could be correct in proposing such an action. President Obama has proposed the minimum wage be raised in an effort to stabilize the economy much like Clinton did. When Clinton raised the minimum wage it stimulated a slumping economy and had increases in the job market.