FISCAL POLICY1. An article in the Wall Street Journal criticized the concept that an increase in government spending can generate an increase in GDP equal to a multiple of the amount spent:“In what passes for debate in Washington, the prevailing notion seems to be ‘putting money in people’s pockets.’ This might be called single-entry Keynesianism, since the money the government puts in pockets arrives by immaculate conception. Something like this was indeed taught in Econ 101 in the 1950s; the government ‘injected’ money, remember, to be ‘multiplied’ a number of times depending on ‘the marginal propensity to consume.’ Consumption good, savings bad.“By the 1960s, the monetarist school of economics had revived, and asked, where does the government get this money it ‘injects.’ If it’s created by the Fed, you’re talking about monetary policy, not fiscal policy. If it isn’t, you have to siphon whatever you ‘inject’ out of the private sector by taxing or borrowing. How does it stimulate to take with one hand and give with the other?” (Bartley, Robert L. “Thinking Things Over: Does Spending Stimulate? Do Deficits?” Wall Street Journal, February 4, 2002 (Eastern edition): pg. A.17)The criticism above implies that fiscal policy alone cannot change aggregate demand because any increase in government purchases must be financed either by raising taxes or borrowing.a. Suppose taxes paid by households are raised by $100 million in order to finance an additional $100 million of government expenditure. Explain why there would be a net increase in aggregate demand as a result.b. Suppose that to finance $100 million of additional government expenditure, the government runs a $100 million budget deficit instead of increasing taxes. How will this policy affect aggregate expenditure and aggregate demand?2. Three years after congress passed President Bush’s tax cuts, a Wall Street Journaleditorial explains the economic impact of the 2003 tax cuts: (“The Tax Cut Record,” Wall Street Journal.: May 12, 2006. pg. A. 18)“The 2003 tax cuts on dividends and capital gains were designed precisely to help business supplant consumer spending as the engine of recovery. By boosting the after-tax return on capital and increasing incentives to invest, the tax cuts provided an immediate lift to stock-market valuations and improved business balance sheets.”Almost at the very time the tax cuts looked like they would pass, business investment began to pick up, and it has kept rising since. This has been a classic investment-led expansion with record amounts of business spending on new plant, equipment, machinery, software, and research and development.”The above quote accurately describes which one of the impacts of fiscal policy on investment and saving discussed in your textbook?2/17/2016 National Paralegal College ViewAssignments NationalParalegal Collegehttp://nationalparalegal.edu/Students/ViewAssignment.aspx?intAssignmentID=2193 1/3Online Legal and Business Studiesback to topAssignments & ExamsCourse: Macroeconomics: ECO1021511Assignment: Assignment 5Fiscal Policy1. An article in the Wall Street Journal criticized the concept that an increase in government spending can generate anincrease in GDP equal to a multiple of the amount spent:“In what passes for debate in Washington, the prevailing notion seems to be ‘putting money in people’s pockets.’ This might be called singleentryKeynesianism, since the money the government puts in pockets arrives by immaculate conception. Something like this was indeed taught in Econ 101 in the1950s; the government ‘injected’ money, remember, to be ‘multiplied’ a number of times depending on ‘the marginal propensity to consume.’ Consumption good,savings bad.“By the 1960s, the monetarist school of economics had revived, and asked, where does the government get this money it ‘injects.’ If it’s created by the Fed,you’re talking about monetary policy, not fiscal policy. If it isn’t, you have to siphon whatever you ‘inject’ out of the private sector by taxing or borrowing. Howdoes it stimulate to take with one hand and give with the other?” (Bartley, Robert L. “Thinking Things Over: Does Spending Stimulate? Do Deficits?” Wall StreetJournal, February 4, 2002 (Eastern edition): pg. A.17)The criticism above implies that fiscal policy alone cannot change aggregate demand because any increase ingovernment purchases must be financed either by raising taxes or borrowing.a. Suppose taxes paid by households are raised by $100 million in order to finance an additional $100 million ofgovernment expenditure. Explain why there would be a net increase in aggregate demand as a result.b. Suppose that to finance $100 million of additional government expenditure, the government runs a $100 millionbudget deficit instead of increasing taxes. How will this policy affect aggregate expenditure and aggregate demand?2. Three years after congress passed President Bush’s tax cuts, a Wall Street Journaleditorial explains the economicimpact of the 2003 tax cuts: (“The Tax Cut Record,” Wall Street Journal.: May 12, 2006. pg. A. 18)“The 2003 tax cuts on dividends and capital gains were designed precisely to help business supplant consumer spending as the engine of recovery. Byboosting the aftertaxreturn on capital and increasing incentives to invest, the tax cuts provided an immediate lift to stockmarketvaluations and improvedbusiness balance sheets.”Almost at the very time the tax cuts looked like they would pass, business investment began to pick up, and it has kept rising since. This has been a classicinvestmentledexpansion with record amounts of business spending on new plant, equipment, machinery, software, and research and development.”The above quote accurately describes which one of the impacts of fiscal policy on investment and saving discussed inyour textbook?2/17/2016 National Paralegal College ViewAssignments NationalParalegal Collegehttp://nationalparalegal.edu/Students/ViewAssignment.aspx?intAssignmentID=2193 2/3Connect With UsNPC Faculty Legal AnalysisOf The NewsLearn More2/17/2016 National Paralegal College ViewAssignments NationalParalegal Collegehttp://nationalparalegal.edu/Students/ViewAssignment.aspx?intAssignmentID=2193 3/3© 20032016,National Paralegal College717 E Maryland Ave, Phoenix AZ 850141561Contact UsHelpPrivacy PolicyTermsSite Map

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Fiscal Policy

Introduction

Fiscal policy entails controlling government spending and tax regime by a central government. In the US, fiscal policy is principally implemented at the federal level via acts of Congress as well as presidential actions. In the government sector, there are three optional tools in the employment of fiscal policy. These tools are government procurement, transfer payments, and taxation. The fiscal policy is founded on the assumption that aggregate expenditures, particularly business investment, are the key sources of business-cycle volatility. The objective of fiscal policy is to influence aggregate expenditures, and consequently the macro-economy, directly through government procurement or indirectly through taxation and transfer payments.

HOW THE CURRENT ECONOMY IS DOING AND CURRENT GDP GROWTH

In regard to the U.S. fiscal policy, the sluggish pace of economic recovery and fragile job creation, in spite of the broad margin of surplus capacity, argues for sustaining supportive fiscal and monetary policies in the near term. In reality, the expansionary fiscal policy played a vital role in forestalling a deeper recession. In reference to IMF analysis, the fiscal measures contribution to GDP growth was approximately 2% points in 2009 and an additional one percentage point in 2010. In the same period, the public held federal debt rose from approximately 36% of GDP in 2007 to approximately 62% of GDP in 2010. In the absence of remedial measures, and considering fundamental fiscal pressures predating the predicament, debt might reach approximately 95% of GDP by 2020. In the absence of policy adjustments, consequently the debt would continue rising. It is in this perspective that, the necessity for urgent measures to secure fiscal sustainability appear to be patently obvious (Romina, The Heritage Foundation 19/01/12).

Current State of Inflation in the US Economy. The reactions Federal Reserve System in response to the latest credit crisis have caused the creation of surplus reserves that are held by banks. If allowed to run free in the economy too fast, the excess reserves would certainly activate an extended interlude of fast rising prices. A significant new approach recently offered to the Federal Reserve System by Congress, is the capability to pay interest on the new surplus reserves. Hypothetically, this new tool ought to be adequate to facilitate the Federal Reserve System to restrain inflation, particularly when implemented used together with other supportive tools such as increasing the Federal funds rate. For that reason, the primary basis of risk is that theory may backfire in practice, but there are no signs currently to indicate that the hypothesis is illogical. The outstanding risk is that the Federal Reserve System may underestimate the situation and linger too long to squeeze monetary conditions. Receding monetary accommodation to circumvent inflation, whilst permitting the recovery to progress rapidly is always a complex exercise. A viewpoint that appears to be extensively held is that persistent economic weakness presents sustained inconsistency to inflationary pressure. Even in the perspective that an under-performing economy and a high unemployment rate present a level of indemnity against inflation over duration of time, that duration is not indefinite (Robert, S. EPI, 05/12/11).

Job Creation in the Economy. Unemployment continues at 9.5%.  Approximately 45.5% of the unemployed human resources have been jobless for in excess of six months. There are 25.8 million human resources who are either underemployed or unemployed.  The labor force is essentially lesser than at the beginning of the recession. This is another indicator of an underperforming economy. With a shortfall of 10.6 million jobs, an unemployment rate of 9.5%, and the private sector still unable to grant a robust upturn, Congressional failure to act in enacting appropriate policies that sustain job creation as well as economic growth, together with renewing comprehensive unemployment insurance and offering fiscal reprieve to the states, is unwarrantable (Alex Adrianson, NYT, 9/16/10).

Appropriate Fiscal Policies for the US Economy. Development of fiscal policy is a complex process. The US economy has experienced a squall of lowering rates and rising rates, market hurdles, increases and decreases in taxation. I would ponder as to where can we find the appropriate balance. Candidly, I do not believe there ought to be a balance. However, even if a balance was found, I believe that the economy would assume its course and unhinge the balance. In my opinion, the expenditure of the government from budget is the basis of the ripple effect that results in rising taxation, the rising debt, and influences each economic indicator. Increased taxation in my opinion, would affect the entire economy, particularly GDP.

Despite a fragile economy, the Obama Administration continues to enlarge the regulatory burden. From the inauguration of the Obama Administration 75 new key regulations, with costs in excess of $38 billion, have been implemented. Whilst Obama acknowledges the necessity restrain regulation, the steps that the administration has taken have significantly backfired. The administration must take significant and real measures to restrain it. Simultaneously, Congress ought to establish critical institutions and mechanisms to guarantee that gratuitous and excessively expensive regulations are not forced on the economy.

In my opinion, the government ought to spend more on Unemployment Insurance benefit. This would provide a very constructive way to infuse money into the economy. This is because; the injected money would be spent instantaneously by long-term unemployed, cash-strapped workers. This spending would consequently create demand for services and goods. It is essential to note that goods and services are generated by workers, and hence this would generate additional jobs.

In my opinion, the expansionary fiscal policy is the most appropriate tool for the ailing economy, particularly in regard to job creation. The proponents on either side of the current debate may make strong arguments in relation to whether a particular policy would generate or wipe out jobs. It is essential to note that, only those policies that enhance the general demand for services and goods in the economy will radically lower the rates of unemployment.

CONCLUSIONIt is essential to note that the government spending cannot stimulate economic growth nor can it stimulate job creation. The money that the government would redistribute in its fiscal stimulus must in the first place originate from somewhere. Whether the government stimulus embodies current or the future taxes, the consequences would be the same. By drawing finances from the private sector in order to provide the same to preferred industries, the government diminishes long-term production as limited resources are relocated to less productive firms and sectors. Policymakers should institute the set of measures presented in this paper, and subsequently pursue supplementary reforms including restructuring of Medicare.

Works Cited

Alex Adrianson. “Spending Cuts Are Good For the Economy”, The New York Times, 16 Sept 2010. Web. 02 Feb. 2012.

Robert, S. “Inflation: Whose Fault Anyway”, Economic Policy Institute, 05, Dec 2011. Web. 02 Feb 2012.

Romina Boccia. ‘New Stimulus Plan Same as the Old: Spend, Spend, Spend’, The Heritage Foundation, 19 Jan 2012. Web. 02 Feb. 2012.