Question

In your own words how the study of Fiscal policy and the role of the CEA fits into the study of Macroeconomics?.do this by providing a minimum of three specific areas in macro such as impact on the circular flow model, current economic concerns such as failing businesses or to the reverse, thriving industries and where fiscal policy may have helped.

Answer 1

Fiscal policy is conceded by the executive and legislative twigs of government which formulate policy pertaining to government spending programs and taxation. Different from the monetary policy which can be altered by the Chairman of the Federal Reserve straight away, fiscal policy is component of the process of making laws and government budgeting, while emergency expenditures can be undertaken.

It is imperative to note down that in the United States, discretionary fiscal policy has only a minor role when dealing with the economy, which does not mean that the government segment is insignificant, but current debates on the topic of fiscal policy are not orientated towards counteracting the business cycle. The White House along with Congress have made deficit reduction the prime focus of fiscal policy and let the Federal Reserve take the economic reigns. Fiscal policy can in a straight line modify the growth rate of GDP and aggregate demand by altering the level of government spending.

Regarding CEA it is a panel of three renowned economists who give advice to the president of the United States on macroeconomic matters. It’s most important goals are interpreting macroeconomic data, formulating economic policy for the White House, while supervising other parts of the government to make sure all departments sponsor the current economic agenda.

CEA assists the President in these five explicit ways.

1. Prepare an annual Economic Report, which gives the economic background and supports the President's yearly budget. While it explains what's happened to the economy over the past year and also forecasts growth for next year.

2. Every month, they make available the Congressional Joint Economic Committee a summary of 11 crucial statistical areas like Gross Domestic Product, which measures entire economic output. subsequent is income and employment, which is followed by production and business activity. It also reports on inflation by using the Consumer Price Index. Its report also includes financial statistics, such as the size of the money supply, credit, security markets, Federal finance, and international statistics. 3. Review federal agencies. It recommends corrections to the President if their activities don't support economic initiatives

4. It also develops particular policies on a regular basis. But according to the law these policies must encourage free competitive enterprise.

They must also recommend conduct to avoid future economic crises or at least end existing ones. lastly, the recommendations must also uphold employment and production.

5. It also Prepares economic research reports, which cover a broad range of current issues..

The CEA provides classy assistance to the President as he formulates economic policy and prepares the annual budget.

The phrase circular flow of income refers to an economic model that describes the movement of income among the entities in the economy like firms, households, government as well as the external sector. In synopsis, it is a model that shows how money flows through the economy. Amplified injections lift the circular flow of income and hence national income while bigger withdrawals reduce the circular flow of income and therefore reduce national income. Fiscal policy involves the fine-tuning of government revenue and expenditure so as to influence economic activities. So as to attain economic growth, expansionary fiscal policy is conducted, which involves the increase in government expenditure along with the reduction in government taxes revenue. That's why expansionary fiscal policy increases injection and reduced withdrawals to increase national income. Government expenditure consists of expenditure on goods, services and transfers. While raising the government expenditure on goods and services, the G factor of the circular flow raises in turn leads to a rise in national income.

As a universal rule, the more the government spends, the more better off the business owner. Extra government spending means additional government jobs, which leads to more consumer spending. A large contract of government spending goes through independent contractors for things like building roads, bridges. In turn contractors and their employees are also consumers of various goods and services , which add to demand. particularly if higher government spending is aided with lower corporate taxes, as part of an aggressive expansionary fiscal policy, small businesses will benefit from greater sales whilst paying less to the tax authority which will result in excellent net profits.

Tight fiscal policy means less spending and more taxes, both of which hit the bottom line of the small business. Governments usually lay off workers or at the very least freeze hiring of new employees so as to spend less. Contracts are scaled down, and some projects which are not highly critical are put on hold or may be cancelled. All of these factors effect in less money put into the system while as there is less spending by both consumers and corporations. All this results in less demand for goods and services, which means lower sales. The effect on small business can be devastating, If the government also raises taxes.