Keynesian Vs Real Business Cycle School

The governments mainly reduce spending cuts and increases tax on both the nation and firms, and back to applying economics belief, the action will only cause a contraction of the aggregate demand of the whole economy, hence, reducing GDP. It is reported that the fiscal measure includes a 60 percent revenue and 40 percent spending cuts. These actions, has decreased the willingness of firms and companies to invest since the after-tax return has been reduced. Next, the of cutting government spending can also mean less jobs for the peoples in the public sector. Unemployment rate increasing from 9.4% to 11.3% (Ferreira.Joana,2017). Using the multiplier effect will be the best to explain, when there is less jobs for the people, it will mean no income for the unemployed and a drop in purchasing power, more importantly it will be very hard for the people to pay the high taxes. It is also reported that the bailout money has all been used to repay the banks instead of using it to correct the

b) In a recession, the number of people experiencing economic hardship increases, so induced transfer payments such as unemployment benefits and welfare benefits increase. Induced taxes and induced transfer payments decrease the multiplier effect of a change in autonomous expenditure such as investments, and moderate recessions making real GDP more stable. Discretionary fiscal policy would be used in an attempt to restore full employment. The government might increase its expenditure on goods and services, cut taxes, or do some of both, increasing aggregate demand. An increase in government expenditure or a cut in taxes increases aggregate expenditure as well.

The American Recovery and Reinvestment Act of 2009, otherwise known as the Stimulus Bill, was one of the first major pieces of legislation passed by the new Democratic Congress in 2009 and signed by newly inaugurated President Barack Obama. The legislation was an attempt to take the United States economy out of a major recession through federal spending. The motivation for this bill was the collapse of the housing market bubble and the mortgage crisis. A result of these problems was the decline of consumer and corporate credit, causing monetary liquidity in the economy. Obama argued that the economy needed a “jump-start” to get moving again; that being the stimulus of 2009. Drafts for the bill called for as little as $275 billion in spending,

If the government spends a dollar on bread and then a baker uses part of that dollar to buy flour. The flour distributor uses part of that to pay the truckers. Then the original dollar of the government spending becomes in effect more than a dollar. In practice the multiplier for government spending is not very large [1]. With each dollar of government spending the GDP increases by only 1.4 dollars [1]. Government spending and taxes are not separate issues. The government can only pay off its debt and expenditures by increasing the taxes. A study [2] suggests that "an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent", a phenomenon likely caused by the fact that "investment falls sharply in response to exogenous tax increases" [2]. Thus, what seems to be a course out of recession may actually be a road into another one.

Many house republicans felt that a stimulus package would not fix the root of the problem. (Hornick, Fitzpatrick, Steinhauser, Constantini ,2010). According to Investopedia (2010), a stimulus package is a package of economic measures put together by the government to stimulate a weak economy by creating jobs and boosting spending. The theory behind the appropriateness and effectiveness of implementing stimulus packages is rooted in Keynesian economics, which reasons that the fallout from a recession can be minimized by increasing government spending (Investopedia,

This act was a 120 billion dollar package that provided tax rebates to low and middle class households. The package also provided tax incentives to businesses to help stimulate investment. According to the research by Christian Broda and Jonathan A. Parker, they found that “households with low income or low wealth spent more than those with higher income or wealth. Households with annual income less than $15,000 increased their non-durable consumption, on average, by more than 6% per week when their rebates arrived, almost twice the response of the typical household.” (Christian Broda and Jonathan A. Parker). So their conclusion was that the “Economic Stimulus Act of 2008” was significantly successful to help households to boost their overall consumption by 2.4% by providing tax rebates, which temporarily stimulated family spending and mitigated economic pressures. From the view of business, the fiscal package assisted businesses in stopping the expenses of depreciable business assets. The businesses were able to use tax relief to increase their investments in new equipment. However, the Act was just providing temporary support for consumer spending and business investment. It did not have a long-lasting effect and was not sufficient enough to recover the U.S.

Fiscal policy: Given the breadth and depth of this recession, it was clear that the Treasury and the entire Obama administration had to take bold actions. In fact, right at the beginning, they were committed to a fiscal stimulus policy package which would be “substantial” enough to pull the economy out of the recession. The final stimulus package signed into law in 2009, the American Recovery and Reinvestment Act, was totaled $787 billion including about one-third tax cuts and one-third aid for states and the unemployed. Of the rest, labor health and education investment got 8%, and infrastructure investment got about 7%. It also included a large amount of government money to

The President of Bartavia wants to enact expansionary fiscal policy with the intention of manipulating inflation and unemployment. Although Bartavia is nearly employing all of its resources in production and extremely close to full employment level, the President is still concerned about the small percentage that is unemployed. Unemployment is the state of a person without a job or a reliable salary or income. Inflation and unemployment are characteristics that are closely monitored to indicate the economic performance of a country. As the economic advisor to the president, I would strongly advise against implementing this policy. Currently, the economy is not in a recession making the trade-offs associated with economic expansion counter intuitive. In addition, the Phillips Curve demonstrates the inverse relationship between inflation and unemployment, making the need for expansionary action unnecessary right now. Finally, Okun 's Law shows how this policy would effect Bartavia 's GDP via the sacrifice ratio. These three reasons show that the long-run consequences outweigh the short-run benefits of expansionary fiscal policy. Therefore, I implore the President to avoid implementing the expansionary policy.

The economic meaning of a recession is that the gross Domestic Product (GDP) has declined for two or more consecutive quarters. Unemployment rises, housing falls, stocks fall and the economy is in trouble. Whenever the government sees that the economy is entering a recession it is important for it to act. The U.S acted in two ways during the Great recession of 2008 through fiscal and monetary policies. Renaud Fillieule identifies that “ Monetary and credit expansions have been the main tools used by the U.S. government and central bank to try and recover economically from the Great Recession of 2008” (Fillieule r, Pg. 99 2016). These Keynesian policies are debatable among economist, none the less they were implemented and put the U.S on the road to recovery.

President Obama's stimulus package, the American Recovery and Investment Act of 2009, consisted of nearly $800 billion in funding. The package consisted of a consortium of thousands of federal tax reductions, and expenditures on infrastructure, education, health care, energy and other projects. The purpose of the stimulus package was to jumpstart the U.S. economy out of recession mainly by generating two to three million new jobs and replacing decreased consumer spending. In my opinion, I believe the U.S. stimulus package was effective in reducing the severity of the downturn. However, the one major issue I find concerning the package was that the stimulus package was only intended to quickly stimulate a rapidly weakening economy and never

Since the global financial crisis of 2008, the UK government has been implementing various policies to combat the recession and stimulate economic growth. This essay will look at how effective the fiscal and monetary policies used since the crisis are in achieving the four-macro economic objectives. In addition, I will provide my input on the best way the UK government can carry out these policies.

growth and low growth of aggregate demand. Keynes urged that the economy can be below full

This recession could have been avoided, however the argument against government intervention using discretionary fiscal policy to tackle recession accentuates the long time lags involved in altering fiscal policy in USA. There was proof in 2000 that the USA economy was slowing. Congress passed a tax cut in 2001, but it took Congress until March 2002 to pass the Economy Recovery Act to provide further inducement to the

The Spanish economy provides the best example among the countries of the European Union to describe that incoherence. At the beginning of the crisis, Spanish public finances were among the soundest in the European Union. The intensity of the crisis and some initial badly designed fiscal stimulus reduced the fiscal space (set by the fiscal rules of the Stability and Growth Pact), raising the deficit over the limit established by the rules. As a consequence of the enforcement of the rules, the Spanish administration will have to apply a restrictive fiscal policy while there is still a recession, while keeping one of the lowest indebtedness levels in the euro zone countries. The starting point is to show that there was enough initial fiscal space as a result of the previous fiscal performances. Then I proceed to explain the policies developed and, finally, provide empirical evidence and some reflections that show that the end of the fiscal space depends on the future monetary policy carried out by the European Central Bank (ECB). The fiscal space Table 1 shows the evolution of Spanish fiscal policy in the last years. As can be seen, public expenditure (cyclically adjusted) shows a stability path in the years prior to the crisis, around 39 percent of gross domestic product (GDP). Fiscal revenues (also cyclically adjusted) show a growth path until 2007, when they reached the maximum value of that period (40.5 percent of GDP). The

The strong performance of public finances in Sweden is an interesting case.Previous studies have compared the current crisis with the banking crisis in Sweden in the early 1990s to study the reason behind Sweden’s strong public finances (Flodén, 2013). When comparing the macroeconomic behavior during the current crisis and during the banking crisis in the early 1990s, it showed a larger drop in GDP and in exports while unemployment increased very less during the current crisis. The absence of large increase in unemployment rate explained the strong Swedish public finances. The relatively steady employment rate is due to the aggregated demand during the current crisis remained strong, and the lower employment in the manufacturing sector was offset by the increase in private sector. Another more important factor contributed to the high employment rate during the current crisis is the Swedish fiscal policy framework, which was established after the banking crisis in 1990s. The following analysis will explain how the fiscal framework can affect the Swedish public finances.