Question One: Fiscal Policy Assume the United States economy has the following:

Question

Question One: Fiscal Policy

Assume the United States economy has the following:

GDP is $18,500 billion down from $17,350 billion nine months ago.

Unemployment is at 6.8% up from 4.2% nine months ago.

Inflation is stable at 2.0%.

MPC=.75

NRU=4.0%

Target Inflation is 2.0%

1.Explain in detail the problem the country is facing. Include an analysis of both inflation and

unemployment including whether the economy is in a recession or not.

2.What is the size of the GDP gap? Show the calculations.

3.Government could address the problem with either increasing government spending, cutting

taxes or both. If the government decided to increase spending to address the problem, by how

much should spending be increased? If the government decided to cut taxes to address the

problem, by how much should taxes be cut? Show the calculations and provide explanations.

4.Should the government cut taxes or increase spending or some combination of both to address

the problem? Detailed Explanations!!

5.What could happen to make the policy you recommended in Question 4 ineffective? On this

question, be sure to read the section in your text beginning on page 298. Don’t just make

something up. It will take a paragraph or two to answer this question because you need to relate

the specific complication to the scenario described in the questio

Explanation / Answer

1).Yes, the recession is still there. I came to know that the recession is still continuing based on the given data and values. If we observe the percentage of values then unemployment is increased to 2.6%(6.8% - 4.2%).

When the recession is going on obviously companies maintain a cost cutting of human activities in work.

For example: In a supermarket there are 500 employees working until the recession start. Once the recession period starts then the management remove half of the employees OR more than half of the employees. This is the scenario will takes place in all the companies.

The Unemployment and Inflation impacts will show on Gross Domestic Product(GDP). If the person employed then he/she doesn’t face a problem with inflation and his life will be go on as usually so the consumption will not be decrease here.

In a society there are 3 classes of people- Rich, Middle and Poor.

Rich class people doesn’t face a problem with inflation. Their consumption will not change. The GDP will not get any negative impact by these kind of people.

Middle class people will face a problem at the terms of consumption. Suppose the family use the sugar in before inflation is 5 kgs whenever the inflation took place in the economy then the family decreased to usage 2 kgs of rice. The GDP get negative impact by these kind of people.

Poor class people will not able to purchase anything so obviously the consumption will decrease maximum here. So, these kind of people may purely depend on Government sector schemes. Here, the GDP will get maximum impact by these kind of people.

The country need to control the prices of all basic necessity commodities. If the country fail then the prices will be raise obviously Rich class persons only can able to purchase and Unemployment tooks place major role in the whole country.

2).In before Nine months the Gross Domestic Product(GDP) was $17,350, after 9 months the GDP is $18,500. The difference of GDP is $1,150 ($18,500 - $17,350).

When the inflation is continued in the country then the prices will be raise and it’s showing the positive impact on GDP. The GDP will be raise according the inflation in the country.

3).Government needs to control the Inflation. If the Government fails to control the Inflation then the impact will be indirectly influence on the Unemployment and also major drastic happened in the way of famine.

The Government needs to follow the proper strategy on Inflation and give basic necessity commodities for poor people OR BPL (below poverty line) on subsidy basis. The Government is responsible for not takes place any famine in their country. If the famine is occured then the negative impact will be shown on the economy in Globalization OR World Trade Market OR International Standards.

Here the Government take necessary actions to control the Inflation by raise the Tax. Normally, the rich class persons and employed persons bare the tax so the tax will be collect from these persons and give the feed to poor people in terms of basic necessity commodities or provisional either free of whole things OR in the terms of subsidy basis.

4).The Government will conduct a committee and take necessary actions and they need to follow some strategy in terms of tax. The government need to create a tax rates on slabs basis.

Suppose the person getting annual income $200,000 then they will collect tax 9% and if the person earning $150,000 then he/she bear 7% tax. The government needs to maintain tax rate according to their annual income basis. So, the government will collect all these taxes and spend the income on poor people and also to spend the amount who will depend on government subsidies persons.

The above information is all stated as when the government want to increase the taxes.

If the Government not interested to raise the tax then what are the circumstances will takes place in the economy and also inflation we will see now.

The government will try to reduce their unnecessary expenditure means mainly they will reduce the import of goods from the other countries. The government encourage the people in their country to provide the loans to business persons and give long terms loans OR subsidy loans to farmers. So they will cultivate in their own country so that they will not depend on Import of basic necessity goods. Also, who has taken the business loans from government they can earn basis on their capability so the unemployment problem maximum will be reduced.

I have mentioned in both the ways in the above, if the government increases the tax and if it is not increased the tax then how it will be controlled the economy from the inflation in the country.

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