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Stimulus measures policy forms

Info: 1560 words (6 pages) Essay
Published: 1st Jan 2015 in Economics

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Part 1. Some reject stimulus measures in all current policy forms. These economists focus on the damaging activities and decisions of (a) private corporations, (b) commercial banks, and (c) wealthy individuals. How can these three groups that lead our private market system, each in their own way, frustrate and foil the goals of a fiscal stimulus program.

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The 2009 Stimulus packages that President Obama released were done so with the intentions of trying to fix the recession bound economy. But the question that surfaced was what the long term results of this stimulus package were. Is it more beneficial or more harmful to our already down falling economy? A fiscal stimulus package by the government consists of generally three options either the use of tax cuts, increased transfers or increased government spending. All three options have one problem in common; it will cause the government budget to increase. It can only serve as a temporary boost to the economy, because the government has to find a way to fund this package. When the government needs to spend money that they didn’t revenue from taxes it is called a budget deficit, they would need to borrow and most likely from foreign reserve banks or through the selling of bonds.

In Keynes’s economic vision “the goal of macro policy is not to balance the budget but to balance the economy at full employment.” This does logically make sense because a low availability of jobs would mean an increase of transfer payments including unemployment compensation and welfare benefits. But if new jobs can be created it will decrease the burden of transfer payments and increase tax revenue. An increase of jobs would equal more taxes to collect and less economic problems when unemployment rates are lower.

But since the recession and fiscal policy both are signs that suggest, the economic state is not currently at its best for investments. Private corporations are less eager to invest being that from a business perspective their initial intent is to make profit. Without the confidences in future profit rates there’s less of an obligation to want to take the risk. I believe that from any business stand point, private corporations are interested in how much profits they can make and maybe secondarily how many jobs a new project or investment can create.

Commercial banks on the other hand could result in a “crowding out effect because the increase in government borrowing will cause a decrease in private sector borrowing”. Crowding out means that there’s less progression which is also an “opportunity cost for government spending”. When the government is shut out of all other options, borrowing money to finance the budget deficits can cause an increase in interest rates. There’s only a certain about of money available for borrowing and if the government borrows, less money is available for business investments.

Wealthy individuals would tend to save more and spend less. They may also invest in foreign counties that stand at a better economy. Therefore private corporations, commercial banks, and wealthy individuals are three power groups that hold the foundation of our private market system. They have the general ability to effect consumption rates because of investments. It’s a circular flow effect, less jobs cause less overall GDP consumption and less taxes, less confidence in economy, which causes less investment.

After all Keynes did say that “the goal of macro policy is not to balance the budget but to balance the economy at full employment. The main problem here is that there are not enough jobs to boast the economy in the long run. The American dream is to do better than the past generation. It’s hard to reach that when jobs aren’t available and a recession at hand.

Part 2. Given our currently high unemployment rate and low inflation rate, argue “for or against” a Supply-Side policy focus versus a Demand-Side policy emphasis.

Aggregate demand or aggregate supply what’s a better a choice when you have high unemployment and low inflation rates? I believe that the demand curve is only going to be a temporary answer to the economic problem. “The demand curve will shift in response to changes in income, changes in expectations (consumer confidence), changes in wealth, changes in credit conditions or changes in tax policy.” The whole purpose of aggregate demand is to stimulate consumer spending. If unemployment is high it’s unlikely that this will solve the problem. How do you tell someone who is unemployed to buy more?

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In contrary I think the aggregate supply is a better policy choice to get the economy back and running. “The policy options to shift AS rightward include: Tax incentives for saving, investment and work, human capital investment, deregulation, trade liberalization and infrastructure development.” This works better because the tax cuts will increase consumption being that it would result in a higher level of disposable income. This means that people would be more motivated to work. Let’s just say Person A makes $40,000 a year and taxes used to 10% and now they are down to 5%, this means that instead of paying $4000 in taxes it would just be $2000. Person A is able to work the same amount and have $2000 extra for disposable income. This guarantees that (C+G+I+(x-m) = GPD) GDP will go up if consumption goes up.

Human capital investment is a long term effect; people find it worth their benefit to invest in school and training. Our goal is to find a way to both lower unemployment and lower the inflation rates. To do this we have to focus on the supply side or the production part of the market. By producing more (new technology) it would set the platform so that better prices levels are available. The technology is going to be useful for production for a while and the investments in education will increase the standards of living. This means that cheaper goods equal more consumption. It’s a long term answer to the economy because the overall GDP will grow. The economy will grow and the production of output rises while unemployment and inflation falls. If all these aspects are intact there’s no way that the next generation couldn’t do better. I believe that a lot of the economic problems we face today are because of the actions that the government made without thinking of the long term effects. If we want our country to become stronger and stronger we have to think in long term strategies and I believe that the Aggregate Supply Policy is the right one.

Part 3. Upon completing ECO 100, you have been hired by the Obama administration to advise them on Foreign Exchange Policy. Their concern is that low interest rates and a large trade deficit have led to a depreciating dollar. Accordingly, first prepare an overview of the way such rates and trade conditions can threaten our currency value. Then secondly, advise the President whether (or not) steps should be taken to strengthen the dollar in foreign exchange markets.

What makes euros worth more than dollars and Chinese Yuan to be below both? The answer is that the currency market determines what the exchange rates are worth. The Foreign exchange market is just like the all markets where there’s a demand there’s a supply. But if there is a more demand than supply then the exchange rate would go up. Meaning if there was a higher demand for U.S dollars; dollar value would increase also known as appreciation. But in this example if there was an excess amount of U.S currency that is above the demand needed then our dollar value fall also known as deprecation. But the rule is that where there’s a lost there is always a gain. Meaning if one country’s currency value goes up some other country’s money value has to go down.

If the value of the U.S dollars improves in the Foreign Exchange Market then it would increase the overall supply of dollars. If our country has a trade deficit, meaning we import more and export less, we should find a method that attracts more exports. I think that the best approach to take would be to weaken the dollar. But in order for that to happen there had to be a way to alter the supply of U.S currency. In one perspective it’s a good thing if our dollars are more valuable we would be able to buy more foreign goods with the same dollar. But if there’s too much of a supply of dollars the dollar may lose value. “As dollars become cheaper, American exports effectively fall in price and demand rises.” In order to reduce the amount of our trade deficit we could export more goods. If our dollar rates were low enough to attract foreigners to buy our good and cooperation would still make their profits then it would all work out. A weaken dollar would work until we could close the gap of our trade deficit and after that we would create a strategy that will strengthen the dollar by lowering the supply of it.


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