The Federal Government Uses Two Major Financial Policies

GDP is the calculation of the total goods and services produced in one year. It measures the economy's size and compares how the economy performs in other countries. GDP is measured in three different ways, as the value of goods and services produced, as domestically produced goods and services spending, and as a factor income from firms. With the value of goods and services produced, GDP is calculated by adding the goods and

Gross Domestic Product or GDP, represents all the goods and services produced within a country’s borders. Measurement of gross domestic products is based on consumption, government spending (at all levels of government), investment, and exports minus imports. The formula for GDP is C + G + I + (X – M). (Colorado Technical University [CTU], 2016). According to the given information the formula for Country A the GDP would be

In the first part of this paper, I will discuss the effect that the expansionary fiscal policy had on the Federal government and the impact on these changes the expansionary fiscal policy when it came to taxes and Government spending. Let’s start by talking about how taxes had to have necessary changes when it came to expansionary fiscal policy. You can think of taxes as being taxes that come from consumer spending, taxes on checks or even taxes on things you own. When thinking of what taxes affect the only

Fiscal policy involves the use of government altering the levels of spending, taxation and borrowing to influence the pattern of economic activity and affect the level of growth of aggregate demand, output and employment. The main goal of fiscal policy is to stimulate economic growth, keep inflation low (target of 2%) and to stabilise economic growth. There are two types of fiscal policy. Expansionary is linked to increases in government spending to boost economic activity and contractionary which is linked to decreasing government spending to lower economic activity.

GDP, or gross domestic product, is the sum total value of all goods and services produced by a country within a given year. To achieve this sum, everything produced and exported, all of the money spent by consumers and government, investments, and many other contributing factors are calculated and combined. A nation’s GDP is used as the main indicator of the economic status of that nation. In general, the higher a country’s GDP is, the greater the health of that country’s economy. However, GDP is not as helpful or accurate a calculation as “real GDP”. Real GDP is a term that refers

net spending by the public. This raises demand for products and employment. It must be noted here that only change in net spending can positively or negatively. If the government incurred a deficit of 15% for 2 consecutive years it would be considered a neutral fiscal policy. If it was a deficit of 15% last year and 10% this year it would be a contractionary fiscal policy but if it ran a surplus of 15% last year and 10% this year it would be called an expansionary fiscal policy ("Economic Effects of Fiscal Policy", 2017.

Monetary policy is the management of the quantity of a nation’s money supply by the nation's central bank. An expansionary monetary is one that increases the money supply. An increase in the money supply will lower interest rates, which increases borrowing for spending. The increased spending increases aggregate demand and the equilibrium level of output. Contractionary monetary policy raises the interest through reductions in the money supply. The higher interest rate lowers spending, which lowers equilibrium income.

Thus, the original government expenditure boost launches a cycle of incremental economic output and household income.

Fiscal policy is decisions by the President and Congress usually relating to taxation and government spending with the goals of full employment, price stability, and economic growth. In order to boost the economy the government will change tax policy and provide incentives to provoke consumers to spend (Heakal, 2009). One of the biggest tools the government has used is the First Time Homebuyer Tax Credit. By giving people a $7500 tax credit when they bought their first home, which made many more people buy houses between the years of 2008-2010, which helped stabilize the market for a little while. Once the tax credit ended, the housing industry started falling again.

If fiscal policymakers increase government spending, G, and there are no changes in either taxes or the interest rate, then ΔAp = 120 = ΔG. Therefore, fiscal policymakers must increase government spending by 120 billion to restore equilibrium income to 11,100, given no changes in taxes or the interest rate.

Monetary policy is used to stabilize the economy both during growth and hard economic times. The Fed uses monetary policy to maintain the money supply in an economy, which in turn leads to the interest rates at which money can be lent in the country. Monetary policy can further be broken down into qualitative policy and quantitative policy. Quantitative methods are ones that physically affect the amount of credit that is actually created in the economy. This method includes the FED fund rate at which money is lent to commercial banks. Dependent on if it increases or decreases; this will cause a corresponding increase or decrease in the money supply of the economy. Due to America’s current financial situation the federal fund rates are close to zero in hopes of providing liquidity in the market place (“Financial Policy: Looking Forward" ). Another monetary policy tool employed by the Fed is the reserve requirement. The reserve requirement is the amount of money that banks need to keep on hand in proportion to the amount of deposits they have in their banks. The reserve requirement can either be increased or decreased, both of which will have a direct impact on the money supply and lending. Lastly, a major impact on the economy and interest rates are the regulations and how much banks are willing to lend to the consumer

However, government purchases will lead to a greater impact on the aggregate demand curve than a change in income taxes or transfers (Rittenberg and Tregarthen, 2009),

Expansionary fiscal policy is made from increasing government spending and/or tax cut, thus, it increases government budget deficit or reduces budget surplus in order to move the economy out of recession or boost economic growth (Forde 2016). Contractionary is decreasing government spending and/or increase taxes, thus, it decreases government budget deficit or increases budget surplus, in order to control demand-pull inflation and slow down economic growth (Forde 2016).

The economy would then move from point A to point B as the price level decrease from P1 to P2 and the output increase from Y1 to Y2.

1: Fiscal policy: concentrating on stimulating the economy through changes in the government income and expenditure.