Macroeconomic as/Ad Framework

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.

Fiscal policy uses changes in taxes and government spending to affect overall spending and stabilize the economy. The objective of fiscal policy is the governments’ typical use fiscal policy to promote strong and sustainable growth and reduce poverty. During periods of recession congress has the option to decrease taxes to give households more disposable income so they can buy more products. Therefore, lowering tax rates increases GDP.

1. What components of GDP (if any) would each of the following transactions affect? What will happen to GDP? Explain.

The discretionary fiscal policy can close a contractionary gap and is also able to close an expansionary gap. An expansionary fiscal policy can close a contractionary gap by expanding government purchases, lowering net taxes, or both. Because the short run aggregate supply curve turns upward, an increase in aggregate demand raises both production and the price level in the short run. A contractionary fiscal policy can close an expansionary gap by slowing down government purchases, increasing net taxes, or both. Fiscal policy reduces aggregate demand to close an expansionary gap which

In constructing these predictions, please keep in mind that I used the same formula that will be used in February

The Global Recession of 2007-2009 also considered as the “Great Recession”, which officially lasted from December 2007 to June 2009, was the worst recession that have happened since the Second World War. European countries as Greece, Germany, and Spain were the most affected. All of them believed in the implantation of “Austerity measures”, set of policies with the ambition of reducing government budget deficit by cutting expenditures, increasing taxes or a mixture of both. Governments reacted to the eurozone debt crisis and Great Recession in different ways. One pattern is that expenditures of government rose and taxes fell from 2007-2009, and that the reverse took place from 2010-2012.

A Fiscal Policy is changes in government spending and taxation in order to achieve certain economic goals. Within Fiscal Policy, there is expansionary and contractionary and in an Expansionary Fiscal Policy there is increased in government spending, lower taxes and/or a combination of both. An Expansionary Fiscal Policy will stimulate production and reduce unemployment. By the federal government spending more money into the economy, businesses will be producing more, which more and more people will purchase. Businesses will expand as well, and will hire more workers, shrinking the unemployment rate to a degree. Since it is a combination of both increased government spending and decreased taxes, it will not overheat the economy. Monetary Policy on the other hand is changes to the money supply in order to achieve particular macroeconomic goals. This involves expansionary and contractionary and a Contractionary Monetary Policy is used to decrease the money supply when the growth in the economy is “too fast”. A Contractionary Monetary Policy will decrease investment and slow economic expansion. In other words, decrease inflation and GDP. We believe that our Contractionary Monetary Policy and Expansionary Fiscal Policy will counteract to find a balance. We are taking money from some government programs with Contractionary Monetary Policy, and using the Expansionary Fiscal Policy to thrust receding businesses into

So when the government decides what goods and services they want to purchase; what payments it wants to distribute; what taxes it’s going to collect or cut, then they are engaging in fiscal policy. Fiscal policy directly affects the budget and the deficit. Expansionary fiscal policy is when spending is higher than the revenue or the budget is in deficit. Expansionary fiscal policy raises the aggregate demand when the government increases purchases and keeps taxes constant and when they cut taxes and increase transfer payments giving households larger disposable incomes. Bottom line, these actions increase consumption therefore raising aggregate demand. (Turnovsky, 2004) Capital, labor, and technology determine a natural rate of output, about which fiscal policies can cause temporary fluctuations in the economy.

The creation of Macroeconomics had two distinctive purposes (ACDCLeadership, 2014). These two purposes provide a measurement for the economy and act as a resolution for problematic situations (ACDCLeadership, 2014). There are three aspects which account for the measurement of the economy (ACDCLeadership, 2014). These three aspects are a recession, an inflationary gap, and full employment (ACDCLeadership, 2014). When a recession occurs there are three courses of action which can be applied to the situation (ACDCLeadership, 2014). The first course of action is no policy, which is to take no course of action and wait the period out (ACDCLeadership, 2014). When there is a period of high unemployment, no policy, causes wages and cost to go down while aggregated supply will increase stabilizing the economy back at full employment (ACDCLeadership, 2014). The second policy that could be implemented is fiscal policy which focuses on government spending and taxation (ACDCLeadership, 2014). In the occurrence of a recession, to stimulate the economy government spending is increased, while taxes are cut (ACDCLeadership, 2014). Lowering taxes increases the consumer response causing aggregated demand to increase (ACDCLeadership, 2014). The third course of action is monetary policy which is the control of money supplied to cause a shift in aggregated demand (ACDCLeadership, 2014). The money supplied is increased causing a decrease in the amount of interest rates, which will increase the

With regards to the reduction of the corporate tax rate from 35% to 20%. The tax reduction will be good for the company and there will be more money available to be either invested or spent on job development. This promotes growth and will also lower the unemployment rate. A corporate tax reduction will take away money from the government but it can be good because it will cause more jobs to be brought back. With more money cycling throughout the economy, the inflation rate will increase. The fiscal policy will essentially have the same economic impact the monetary policy will.

Fiscal policy is the governments spending policies, which influences the conditions economy as a whole. With this policy, regulators can improve unemployment rates; stabilize business cycles, control inflation, and interest rates to control the economy. The government adjusts the spending and tax rates to influence the nation’s economy. The idea is to find the balance between public spending and changing tax rates, by increasing or lowering taxes may cause the risk of causing inflation to rise. If the economy had slowed down, unemployment will go up, so consumer spending will go down and businesses are not making enough profit. If the government decides to raise the economy by decreasing tax, it will give the consumers more money to spend while it is increasing the form of buying services from building roads or schools.

Expansionary fiscal policy consists of change in government expenditures, or taxes, in order in influence the level of economic activity, inflation, and economic growth (Amacher & Pate, 2012). Expansionary fiscal policy is when taxes are cut and government spending is increased. Lower taxes will increase disposable income. The increase in disposable income will lead to higher levels of consumer spending. In theory the more money that consumers spend, the higher the chance for economic growth. Tax cuts will also lead to an increase in aggregate demand. Aggregate demand is the total demand for goods and services is the economy. As stated earlier, a tax cut will increase people’s disposable income therefore increasing the amount of money available for consumption. The increase in consumption would increase the demand for goods and services. This in turn increases GDP (gross domestic product). GDP is the value of the total output that the economy produces in a given time period

Fiscal policy is related to macroeconomics because the taxation and spending of the government can have an effect on the economy. Understanding the effect that changes in policy have on the economy can be used as a tool by the government to alter the level of activity. So fiscal policy can be used to either speed up or slow down the economy based on the current needs and future outlook. This is significant to the success of the economy because it helps to control the wild fluctuations that happen as an economy develops. As economies progress, they go through business cycles of expansion and contraction. These cycles can vary greatly and the wild swings that are possible can be very bad for an economy. So fiscal policy can be applied to these cycles to smooth out the economy and guide it in the direction they need. The two approaches to how this can be done are known as expansionary and contractionary fiscal policy. According to our book (Miller, 278) expansionary policy is used when there is a recessionary gap and contractionary policy is used when there is an inflationary gap. Expansionary policy works by increasing government spending or cutting taxes which can increase aggregate demand and stimulate growth. Contractionary policy works by decreasing government spending or increasing

Use the AS/AD framework to show the separate effects on GDP, inflation and public sector borrowing on any single national economy ( unnamed) of:

Throughout the semester many concepts of macroeconomics and economics as a whole have been discussed thoroughly. Macroeconomics is defined as the study of the economy as a whole. The study of macroeconomics consists of many economic indicators. These economic indicators allow analysis of economic performance, predictions of future performance, and will indicate the overall health of the nation. Economists want to be able to forecast the direction the economy will take in the near future and they rely on different economic indicators. They have never agreed on a single economic indicator to predict the future. Some indicators are better than others, but none is consistently accurate; all give a false signal on occasion. The six economic indicators that will be focused on are Gross Domestic Product, Unemployment, Consumer Price Index, Retail Sales, Consumer Confidence, and Durable Goods. The economic indicators help see where the economy is in terms of the business cycle, which shows the rising and falling of economic conditions over time.