In: Economics
1. Choose any presidential candidate and explain his/her fiscal policy platform. What impact is this policy (in full or individual components of this policy) likely to have on inflation, employment, aggregate demand and supply?
2. Explain the most recent monetary policy move by the Fed. Is this expansionary or contractionary policy? Why did the Fed choose to pursue this policy? What impacts of this policy do you observe? For best results, look up recent FOMC announcements.
Answer 1:
It has been observed that the Trump administration has used expansionary fiscal policy with the Tax Cuts and Jobs Act which led to decrease in tax rate in the economy and also increased discretionary government spending especially on defense. He also extended unemployment benefits and funded public works projects. Thus, the administration has used expansionary fiscal policy.
The expansionary fiscal policy has led to increase in consumption expenditure, government spending and also increased investment expenditure. This has resulted in increase in aggregate demand in the economy. This can be depicted in the diagram below. A rightward shift of the aggregate demand curve to AD' has led to increase in inflation rate and increase in production or national output. This led to increase in labor demand which has resulted in decline in unemployment benefits. The fiscal policy does not impact aggregate supply curve in the economy.