Question

3. Please list the 4 key supply side growth factors we discussed, and discuss their viability in terms of getting our economy growing again, given that today our economy is not growing.

a. The slides should provide you with what you need here.

b. The issue of viability – if the economy is growing slowly or not at all, do we have any chance of achieving success with each of the 4 growth factors? What will likely cause us problems? What approaches could we use to increase our odds of success? You need to think carefully on this one.

4. Creative problem solving

Scenario #1:

The rate of growth in the US economy is currently 0.5% annually. Your mission is to increase our growth rate to at least 4% annually, without setting off unacceptable levels of inflation. You have the tools of fiscal and monetary policy available.

a. Present your solution to the problem – write it down first.

i. Strategy for creating your solution:

1. First identify a specific natural resource and think through how having more of it or a better quality of it could lead to significantly increasing the GDP growth rate.

2. This will lead you to a general solution to the problem.

3. Write it down! The explanation of the solution should take at least one good paragraph!

4. Determine what will be required to make the solution happen, typically it is money.

5. Think of ways to use your fiscal and monetary policy tools to get the needed money.

6. To attack the problem you must select at least one Monetary Policy tool and one Fiscal Policy tool.

b. Write down the names of the one fiscal policy tool and the one monetary policy tools you picked.

i. Remember – for this question you need one Fiscal Policy tool and one Monetary Policy tool.

c. Explain why you picked the tools that you picked and why you did not select the other choices.

i. Specifically explain what is good about the tool you selected and what is not so good about the tools

you did not select? Do this for

both the monetary and fiscal policy tool that you selected. The key here is to use some decision criteria in making your choice.

d.,Thoroughly and completely explain how your solution would work to solve the problem. You must include and explain the use of your monetary and fiscal policy tools and indicate the impact your solution would have on the key economic variables. Please present your answer using a chain of events format. Be specific. I need to see the detail.

Answer 1

3 4 key Supply side growth factors are as per below.

a)

1 Corporate tax cut: This will increase more income in the hands of companies and their owner and due to this the company will hire more labour/workers and due to that production will get increased and also unemployment will get decreased and labour's income will get increased and due to that aggregate demand will get increased and this will result into increase in economic growth.

2 De-regulation: De-regulation reduces/removes restrictions to growth and reduces cost for compliance and encourages the free market supply side economy and increase production and this will result into increase in the economic growth.

3 income Tax cut: Income tax cut increases the money in the hands of labour/worker and resultantly they increase the demand for goods and services and this increases the production/supply side of production and this increases the economic growth.

4 Greater competition in labour market and labour mobility: It is done through the removal of restrictive practices and labour market rigidities like in 1980's trade union powers were reduced with great extent including workers right/ability to call a strike. Simultaneously labour mobility also increases the economic growth by improving labour mobility.

b) Above four key majors actions will achieve economic growth based on degree of implementation and the respective tax rate level at the time of slow economic growth or recession.

Income tax cut: For example if income tax is already very low then it won't have major effect on supply side of production and demand by labour/worker and it is also worth noting that a income tax cut will have immediate positive effect on lower income bracket group and they will immediately start spending and their spending will get increased but the high income tax bracket person won't spend the money saved through income tax cut rather they will save, invest or will pay off their debt and that will only benefit the stock market and banks not the retail market/market for goods and services.

Corporate tax cut will have positive effect on increase in the growth momentum of economy and this will certainly move the economy out of slow growth or recession, like in case of President Reagan in 1980's he had reduced corporate tax rate from 46% to 40% and also reduced the marginal income tax rate heavily and that helped move the economy out of worst recession since great depression. Reagan also increased the defence spending at that time.

Better education and training to labour will also improve their skills and mobility and this will also help economy move out of slow economic growth or recession.