Economic Policy and Practice
Economic Policies And Practices ECO2072 / Professor Gordon 4/5/2013 Assignment Due Date – 4/3/2013 Economic Policies And Practices Understanding the foundation for which our economy and society as a whole is built upon, the need for a controlled and managed monetary system to function effectively in order to facilitate trade and stabilize the flow within our economy is a must.
To facilitate this need the federal government implements tools for analyzing the economy in order to regulate and control, and decisions are made based on the inputs and observations made to stabilize and enable the money to grow and retract as required within our economic system. Again, based on the aforementioned, the phrase “money makes the world go around” therefore can be attributed to the controlled systems, policies and/or a networks of our federal government for which are governed to enhance and manage both the levels of and effects of our financial monetary system.
As we proceed, we will attempt to explain various government policy changes or unplanned events which can and may occur, and the resulting economic events or activity that will be impacted within our economy and the effects it has upon and within our economy. Implemented Budget Plan Resulting In Increases In Debt And No Plan For Problems As we look at our Federal Governments role in execution and control of our nation’s budget and the current budget deficit we can only pray that those in charge of the decisions utilize the tools available to them to manage and soften the blow to the economy as the deficit grows.
Where in the case our government employs a budget plan over several fiscal years and results wherein our economy sustains significant increases in the nation’s debt and displays no signs of relief nor presents no plans to deal with the problems, several outcomes would be likely in the economy. Mankiw, 2009, Ch. 32, P. 706 describes one effect being where government spending exceeds government revenue thus representing negative public saving, therefore reducing national savings, thus reducing the supply of loanable funds, Increasing interest rates, and crowds out investment.
Amadeo, 2013 shares additional effects of this scenario wherein the deficit adds to a country’s debt each year and as the debt increases and the interest on the debt must be paid, it increases spending while adding no benefit to the economy. If the interest payments continue to rise, it can begin to create a drag on the economy’s growth. Mankiw, 2009, Ch. 32, P. 706 states additional effects in that when budget deficits raise interest rates, both domestic as well as foreign behaviors cause U. S. net capital outflow to fall.
Therefore, in an open economy, our government’s budget deficit raises the economy’s real interest rates, thus crowding out domestic investment, and causing the currency to appreciate, consequently pushing the trade balance toward deficit. Enactment Of New Tariffs And Quotas On All Imports The economy uses a model of aggregate demand and aggregate supply as a means to analyze the economic fluctuations of supply and demand. This model depicts both the overall price levels in the economy and the overall quantity of goods and services produced in the economy.
If in fact the Federal Government were to enact new tariffs and quotas on all imports, the economy would indeed experience effects from this activity. Mankiw, 2009, Ch. 33, P. 725-726 describes the model of aggregate demand and supply being what most economist use to explain short-run fluctuations in economic activity around the long-run trend. The aggregate demand curve displays the quantity of goods and services for which households, firms, the government, and customers abroad want to buy at each price level.
The aggregate supply curve shows the quantity of goods and services that firms choose to produce and sell at each price level. The impact the economy would incur in the case of tariffs enacted being taxes imposed on imported goods is the increase of the price of the goods in the domestic market, therefore domestic producers benefit due to they receive higher prices, the government benefits through the collection of tax revenues thus resulting in less goods produced and the consumer pays higher prices (Investopedia, 2013).
In the case of quotas and their effect on the economy, we find that quotas are numerical limits which are imposed on imported goods and in such a case of enactment consumers are truly harmed by the quotas while domestic and foreign producers will benefit once again by receiving higher prices for goods and services (Investopedia, 2013). Loss Of Confidence In Leadership In Ability To Manage And Create Jobs The Federal government is the entity that steps in when our economy incurs unhealthy conditions within its business cycle.
It is presumed that our government has tools to detect and analyze our economy to understand those events that have the potential to alter the economy’s equilibrium. With respect to the aforementioned, problems arise when the general public loses confidence in the leadership and their ability to manage the economy to include job creation. Mankiw, 2009, Ch. 33, P. 741 shares, that in the scenario of lack of confidence we find that consumers again alter their plans for the future cutting back on purchases and spending.
The effect of this cutback impacts the aggregate demand curve as well as the aggregate supply curve thus impacting either the short-run equilibrium and/or the long-run equilibrium. The consequences result in falling incomes and rising unemployment due to reduction of output mirroring the shift in aggregate demand responding to lower sales and production. Amadeo, 2013 states; “consumers who drive 70% of the economy won’t spend if they don’t believe the future will be safe and secure.
Therefore, the underlying role of the government is to create confidence, powering the economic growth needed to create jobs”. Decrease Taxes In Effort To Stimulate The Economy Another tool within our government and its fiscal policy to regulate and control economic growth is the taxation level. Some claim that, tax rate cuts can lead to increased economic growth, and wealth, while others claim that by reducing taxes correlates to the benefiting of the wealthy due to they pay the most taxes already.
Our government possesses the powers to tax which in turn gives it greater control over its revenues. Mankiw, 2009, Ch. 34, P. 773 shares, that when our government reduces personal income taxes, it increases the take-home pay of consumers. These households will save some of this additional income, and will also spend some of it on goods and services. Because reducing taxes increases consumer spending thus stimulating the economy, the tax cut shifts the aggregate-demand curve to the right. Conversely, a tax increase represses consumer spending and shifts the aggregate-demand curve to the left.
The greater question lies in ‘what is the impact in our economy of a tax reduction for those making over $250,000’? Amadeo, 2013 shares that, the government considers those families that earn more than $250,000 yearly are wealthy and therefore should pay more taxes due to their ability to afford it. Amadeo, 2013 continues by stating that, economist say they do not spend these tax cuts, but save and invest them and therefore tax cuts for the wealth do not stimulate the economy. Investment Level’s Decrease Due To Lack Of Confidence In Economy
The economy revolves around the ability of consumers to invest their moneys in goods and services or deposit ones excess money into interest bearing savings accounts wherein which the financial institutions would use the funds to make loans to consumers for the purpose of investing in personal interests. The ability to invest is crucial to the long-run of our economy’s success and the functions of aggregate demand and supply and when these levels of investment decrease due to a lack of confidence in the economy several consequences begin to unfold in the economy. Mankiw, 2009, Ch. 33, P. 41 shares that, during such an event many people lose confidence in the future and alter their plans, therefore households cut back on their spending and refrain from major purchases, and businesses retract from the purchases of new equipment. AmosWeb, 2013 states; “the confidence that consumers have in the economy affects their willingness to undertake consumption expenditures”. Any change in the confidence of consumers wherein by changing consumption expenditures, will induce changes in the economy’s aggregate demand therefore causing a leftward shift of the demand curve. Interest Rates Kept Artificially Low By Fed’s For Several Years
The economy revolves around the interest rates on the many investments of the consumers and plays a crucial part in the spending on goods and services. The impact on the economy can be said to be two fold in the event that interest rates are kept artificially low by the Federal Reserve over a lengthy period of time. Mankiw, 2009, Ch. 33, P. 728 states that, interest rates affect spending on goods and services, therefore a lower interest rate makes borrowing less expensive and it encourages businesses to borrow to invest in operations and equipment as well as it encourages consumers to borrow to invest in self and home.
This said, lower interest rates increase the quantity of goods and services in the economy. Conversely, Shilling, 2012 shares that artificially lower interest rates can have negative impacts on consumers in where those who are saving money are now receiving minimal to little return on their bank and money market accounts. Additionally, the day of the free checking accounts are fading away as well as banks and thrifts who deal with the lower interest earnings are increasing the amounts of required balances on checking accounts that pay zero interest up to a set minimum.
It is also noted that many savers are leaving the money markets funds for the protection of accounts covered by the Federal deposit insurance corp. which is displayed in the M2 velocity of money. Conclusion Based on the aforementioned and the understanding of the foundation for which our economy and society as a whole is built upon, the need for a controlled and managed economic system to function effectively in order to facilitate trade and stabilize the flow within our economy is a must.
To facilitate this need, the federal government implements policies and practices within the economy in order to regulate and control, and base decisions on those inputs and observations in order to stabilize and enable the money to grow and retract as required within our economic system to maintain a balanced equilibrium. Again, based on the aforementioned, the phrase “money makes the world go around” therefore can be attributed to the controlled systems, policies and/or networks of our federal government for which are governed to enhance and manage both the levels of and effects of our financial monetary system.
Reference Amadeo, K. (2013). Budget deficit. U. S. Economy, Retrieved from http://useconomy. about. com/od/glossary/g/Budget_Deficit. htm Amadeo, K. (2013). Job creation – statistics, ideas, and job creation by president. U. S. Economy, Retrieved from http://useconomy. about. com/od/Employment/tp/Job-Creation. htm Amadeo, K. (2013). Should families making over $250,000 a year get tax cuts? President George Bush Tax cuts, Retrieved from http://useconomy. about. com/u/ua/usfederaltaxesandtax/Tax-Cuts-Should-The-Wealthy-Get-Tax-Cuts. htm AmosWeb. (2013). Consumer confidence, aggregate demand