Principles of Macroeconomics
Evaluating Fiscal Policy Alternatives simulation
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 3.5 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 $41.82 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...