Question

Creative problem solving.

Scenario #2:  

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.

****Focus on increasing the quantity and / or quality of human capital as a means
to stimulate economic growth.****

Q1. Present your solution to the problem – write it down.  

Strategy for creating your solution:

--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.  

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

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

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

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

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

Q2. Write down the name(s) of the one fiscal policy tool and the one monetary policy tool that you picked.

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

Q3. Explain why you picked the tools that you picked, and why you did not select the other choices.

--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 decisin criteria in making your choice.

Q4. 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.

Please Answer all of the questions. Thanks :)

Need one fiscal policy and one monetory policy.

Answer 1

So, increasing GDP growth from 0.5% to 4% is very difficult in the short-run. Economic variables take time to adjust to new incentives. Hence it is possible only in the long run. Also, there can be a temporary inflation as the growth picks up. If the higher growth is based on higher productivity, the inflation subsides in the long run (as has been experienced by US in the past).

1. So one important factor integral to success of economic growth of USA is its Highly skilled labor force. USA has had best engineers, academicians, a risk-taking business class supported by system and an educated workforce. All these factors are conducive to business sentiment in the economy and the economy flourishes. This is reflected in the success story of Silicon-valley and why it has been difficult to replicate in any other country. So spending on its human-capital is very important for US to grow higher.

Also, equally important is higher investment in Research and development (R&D). Higher investment in R&D opens up new opportunities to employ the educated working class to new jobs in the changing business environment. The more such opportunities are, the better off an economy is.

All this will require higher expenditure on education at all levels i.e Primary as well as higher education, encouraging innovation and aptitude etc. The government can play an active role in providing this environment through both budgetary support and regulating the markets.

2. Fiscal policy tools: higher expenditure on improving health and education status of the workforce by increasing social expenditure and providing better services. Also, government should encourage risk-taking capabilities of new entrepeneurs.

Monetary policy tools: easy accessibility to credit to firms so that they can finance their investments projects.

3. Spending on developing new skills and technology is important because the global environment is getting very dynamic and very competitive. Only those firms can survive in competitive international markets which adopt quickly to changing environnment and still remain efficient. So higher government expenditure and government support is required.

An expansionary monetary policy is required because credit is the blood of the economy. In order to increase jobs, firms first need to finance their investment projects and bank credit is an important source of finance for business firms.

However, note that too easy monetary policy can have detrimental effect on growth via increasing the inflation. So there has to be a balanced approach to monetary policy.

4. An educated workforce also demand different and new kinds of goods & services, have aspirations to grow so people demand better jobs. This improves the demand side factors to economic growth in the sense that more demand is created for different kinds of goods and makes the economy attractive to investments.

A better and educated workforce is more suitable for employment. This increases/improves the supply side factors to economic growth. It is because new business firms find it easy to train new recruits. It increases in the productivity of the firm which in turn increases its profits.

An economy achieves higher economic growth when both supply and demand side move in the same upwards direction.