Question

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.  

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

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

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 names of the one fiscal policy tool and the one monetary policy tools 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 decision 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.

Answer 1

For our project let us take the energy sector and in particular the solar energy sector. The United States of America is the second largest consumer of power(electricity) in the world. Being an advanced nation, with numerous large scale industries and growing infrastructure, it is only clear that the power needs of the United States will grow. Though it is the second largest consumer of electricity with China being the largest, the US still has much larger average energy per capita than most of the world nations including China.

Now, let us consider the most abundant form of energy that is available all across the world, which is Sunlight. The use of solar power as an alternative form of energy supply is growing every year. In fact, some reports suggest that the average cost of generating 1 megawatt per hour would be $42.1 in a solar power plant while it would cost $48 for gas alone.

Assuming that the amount invested in Solar power plants (which is far more expensive than a gas-based power generation plant) , the cost of investment is comparitively higher, which increases the government expenditure. This means money will be generated by borrowing and/or taxes. This reduces the money supply available in the household for consumption. But this will be in the short run as more investment in the solar power sector would mean more more jobs for people and the government reduces its dependency on natural gas. This reduces short term costs and increases long term benefits. A cost to benefit analysis would reveal that power generation through coal and natural gas comes up to around $500 billion per year with corresponding environmental and health costs of upto 9 cents per Kilowatt per hour. Studies also show that solar power plants employ more people in the United States than any other industry in the world.

With rising environmental concerns across the world and the United States leaving the largest carbon footprint, it is only imperative that a top-dog takes the plunge into the clean energy sector, and thereby leading the rest of world in doing the same. The United States has also an upper hand in technology trade with respect to establishment of solar power plants. Many countries could be encouraged to switch to solar power highlighting the environmental concerns and through commonly adopted climate change pacts. The US being a large scale producer of amorphous silicon, an element used in solar cells. And also in posession of the technology, it can benefit by the means of gains from trade.

A report in the NY times has revealed a change in the global trade pattern from simple goods to knowledge/technology intensive goods. This means the US, has an advantage due to gains from trade of technology for other common goods. This also means a reduction in costs due to reduced dependency on natural gas and coal and also leading to an accrued long term benefits which could be many times higher than the costs. This is proven by cost-benefit analysis done on this issue by several agencies.

So, key points to remember are--

• Reduced costs
• Increased economic benefits( i.e) less expenditure on health and environmental costs
• More jobs
• Gains from trade (technology)
• Easy availability

All the above points translate into more income in the hands of the people, as a result of increase in investment and output levels. This is the way to GDP growth.

Question(2). Fiscal policy tool -- taxation

Monetary policy tool -- Investment or purchase of bonds in open market.

Question (3). Fiscal policy tool that could be used for this purpose would be increase in import tariff on petroleum and environmental taxes on firms that increase social costs. This tool is used as it would increase the amount revenues for the government. This would mean in increase in price level which could be offset by increasing income in the hands of people as a result of more jobs. The rates have to be determined in such a way that a fine balance is struck.

Monetary policy tool used for achieving this selling securities in the bond market at attractive prices. This would reduce the money in the hands of the consumer while increasing money available with the government. This money can be used for investment in solar power plants. As less money is available in the hands of the consumer for consumption the inflation will not skyrocket. This will also bring down the price level of the products.

Question 4.

Increase in investment in solar power -> means more jobs -> less dependency and expenditure on costly natural gas -> gains from trade of solar power technology -> reduced environmental costs -> Increase in long term benefits as a result of clean environment and good health-> Once the break-even point is reached there will be very minimal costs as sunlight is abundant and free. -> Monetary policy tools mentioned above initially reduce consumption due to less money supply with households and maintain price level. -> Consumption is balanced out by increase in jobs and therefore increase in purchasing power-> Fiscal policy tool (taxation) generates revenue for the government that would spend the money it gets using the above monetary policy tools to provide subsidies to firms and maintain price level. -> gains from trade ->>>>>>> Cleaner environment, self-reliance with respect to energy, -> increase in GDP growth as a result of economic benefits due to increased income, by increasing jobs, more money available to spend on other sectors as dependency on natural gas for energy which means other Middle eastern countries is reduced. -> Overall economic growth.

It is important to strike a fine balance between the above mentioned tools and the strategy by doing a detailed cost-benefit analysis and fixing proper rates. The plan could be compartmentalised and carried out in a phase after phase manner keeping an eye on the economic indicators at every level.

Good luck!