Question

Over the last several years, fiscal policy has attempted to stimulate the economy. Do a short search in the Internet. Cite and briefly summarize an article about current fiscal policy and its effects on the overall economy (no more than one paragraph and please include the citation). Provide your view of the policy which was discussed and how the concept of government spending multipliers are used to forecast the policy effects.

Answer 1

Answer :-

Economic growth is the increase in the market value of the goods and services that an economy produces over time. It is measured as the percentage rate change in the real gross domestic product ( GDP ).

Determinants of long-run growth include growth of productivity, demographic changes, and labour force participation. When the economic growth matches the growth of money supply, an economy will continue to grow and thrive. Inflation occurs in an economy when the prices of goods and services continue to rise while the purchasing power decreases. When the GDP growth is only caused by increases in population, the growth is excessive.

Causes of growth through natural resources:

The United States has an abundance of natural resources. Its large land mass compares to Russia, Canada and Australia. America's natural resources also include:

• Tillable soil in the Great Plains, called the breadbasket of the world.

• A temperate climate.

• Large deposits of oil, coal and natural gas.

These natural resources attracted another of America's great resources which is its population.

The United States has a large and diverse population that provides a large test market. It gives domestic companies experience in knowing what consumers want. This has given the United States a comparative advantage in producing consumer products. As a result, over 70 percent of what the country produces is for personal consumption.

This also gives U.S. companies an advantage in exporting. As a result, the United States is the world's fourth largest exporter. The country exports capital equipment, such as computers, semiconductors and medical equipment. It also exports industrial machinery and equipment such as plastics, chemicals and petroleum products. Almost half of the economy depends on services. The most successful are financial services, and health care and intellectual property such as technical information.

Causes of growth through Governmental Policies:

Most governments try to manage economic growth. For one thing, growth increases tax revenue. Businesses also hire workers, increasing income. When people feel prosperous, they reward political leaders by re-electing them.

The government stimulates growth with expansive fiscal policy. It either spends more, cuts taxes or both. Since politicians want to get re-elected, they use expansive fiscal policy to stimulate the economy.

Expansive fiscal policy is addictive. If the government keeps spending more and taxing less, it leads to deficit spending. It works for a while, but eventually leads to higher debt levels.

In time, as the debt to GDP ratio approaches 100 percent, it slows economic growth. Foreign investors stop investing funds in a country with a high debt ratio. They worry they won't get repaid or that the money will be worth less.

Therefore, governments should be careful with expansive fiscal policy. They should only use it when the economy is in contraction or recession. When the economy is growing, its leaders should cut back spending and raise taxes. This conservative fiscal policy ensures that the economic growth will remain sustainable.

Sources:-

1.Anderson, J. E. (2005). Fiscal Reform and its Firm-Level Effects in Eastern Europe and Central Asia, Working Papers Series wp800, William Davidson Institute at the University of Michigan

2. D. Harries. Roger Fenton and the Crimean War