Evaluating Fiscal Policy Alternatives simulation Principles of Macroeconomics Evaluating Fiscal Policy Alternatives simulation Introduction Fiscal policy is whenever the government changes government spending or taxation as a means of influencing the market economy. This change takes place to stimulate or to restrain inflation. Fiscal policy is the manipulation of trends in the economy by the government. The content of this paper will discuss the effects of the changes in fiscal policy based on the evaluating fiscal policy alternatives simulation. Well Ruled
The first part of the simulation for the year 2xx6 showed the decision made was “well ruled”. The fiscal policy decision made this year will have an impact on the real income and real gross domestic product of the economy in the future. The policies will lead to an increase in real gross domestic product. This will lead to an increase in real income and a decrease in unemployment. The change in government expenditure and / or taxation shows the economy will overshoot the potential output for the future. This will also cause higher inflation than the current level.
The simulation showed increasing government expenditure on infrastructure projects is better than investing in education. A crucial need for this country is developing infrastructure to connect different parts of this country. Infrastructure projects will generate employment suitable to the skills the labor has. Erehwon is skewed toward unskilled labor and labor skilled in construction, engineering, and design. Education will not generate enough employment for the people who are unemployed in the economy. This is because of the shortage of trained faculty in Erehwon.
Reducing taxes will increase popularity as a President more than increasing government expenditure will. The downside to this is fulfilling the economy’s crucial development needs will not happen unless there is an increase in government expenditure. The simulation of 2xx6 showed an increase of government expenditure on infrastructure projects by $100 million and an increase in expenditure on education by $100 million. There was a decrease of the income tax rate by one percent. This will decrease the income tax revenues by $200 million. The budget deficit remains at 3. percent of the gross domestic product. The final scenario showed these measures will increase real gross domestic product in the economy to $41. 46 billion, inflation will rise to 5. 56 percent, and unemployment will be at 4. 18 percent. Tangled Policy The second part of the simulation for the year 2xx7 showed the decisions made were a “tangled policy”. The fiscal policy decision made will have an impact on the real income and real gross domestic product of the economy in the future. The objective of the simulation was to find a remedy for the inflation situation in the economy.
The policies chosen will reduce the inflation to some extent and will increase popularity. The simulation showed better choices could have been made for controlling inflation and increasing popularity. The decision was made to decrease expenditure on infrastructure projects by $200 million and decrease expenditure on education programs for low-income students by $200 million. The choice was made for the income tax rate to remain unchanged. The budget deficit will reduce by 3. 05 percent of the gross domestic product, and policies will decrease real gross domestic product in the economy to $41. 2 billion. The decisions made will lower the price levels in economy and reduce inflation. This decision will bring down inflation to 6. 8, but unemployment will increase to 3. 74. The reduction in government spending as the strategy to reduce inflation in the economy was the correct decision made, according to the simulation. Popularity was decreased to 3. 05 because of the fiscal policy decision made. The impact of the pre-election fiscal policy will take effect this year. The economy could have revived from the recession and the latest tax cut could cause inflation.
The simulation shows the first item to address is to reverse fiscal decisions. Ideal President The last part of the simulation for the year 2xx8 shows the decisions selected were the result of the “Ideal President”. The simulation showed the decisions made successfully handled the conditions in the economy and put the economy on the right track. The decisions made will lead to the real gross domestic product of the economy moving closer to the economy’s long-run potential output. During the year of 2xx8 defense spending on social welfare programs was decreased by $200 million.
The income tax rate was increased by one percent. This will increase income tax revenues by $200 million. The budget deficit is 2. 52 percent of the gross domestic product. The decisions made in the simulation increased popularity to 3. 35. The policies chosen will lead to s real gross domestic product of $41. 12 billion. Inflation will be at five percent and unemployment will be at 4. 46 percent. The simulation shows once the multiplier and the long-run potential output is known a determination is made to follow a contractionary fiscal policy or an expansionary policy.
A determination can also be made to determine the exact amount that should be adjusted for government spending and / or taxation to bring the economy closer to the long-run potential output. The Permanent Income Hypothesis gives a reason why the multiplier may not work the way the theory predicts. People make consumption decisions based on what he or she considers “normal” income. People will save more when the income is higher and use saving when the income is lower to increase consumption. The “crowding out” effect is another reason the multiplier may not work.
An increase in government expenditure or reduction in taxes increases the government’s budget deficit. The government finances the deficit by selling bonds to the public to raise money. This cause and increase in interest rates, and makes it more difficult for businesses to borrow money for investments. Workplace Regarding the results and the information and knowledge I have gained completing this simulation I can now understand why the organization I work was required to reduce jobs and other expenditures. With the past years economy going in to a recession there has to be cuts in many areas in the organization.
Although, I do have many questions the simulation raises. The organization I work for did reduce jobs by doing layoffs but this did not help the economy. This increased the unemployment rate. The organization also gave the employee’s who remained an increase in pay. This concept does not make any sense to me. I do not see the compiled numbers at the corporate level but I know most of the employee’s said we would rather have not received the increases so the other employee’s could have kept his or her jobs. I do know many changes are in progress for the organization I work for and the employee’s are told that in time we will see results.
I am not sure the changes will be positive changes knowing what has already taken place. Conclusion Governments and organizations work on estimates of performance of the economy. The estimates could be misinterpreted. The potential income level is not always apparent. This means the government and organizations are not 100% sure how much change is needed in situation of inflation or a recession. A fiscal policy to consider is balancing the budget. This involves reducing expenditure and tax rates. Monetary policy is another measure that can be used to bring the economy out of a recession.