Suppose that the governor of Georgia wishes to pass fiscal policies that would h

Question

Suppose that the governor of Georgia wishes to pass fiscal policies that would have an immediate impact on the state’s economy, and hence improve his chances of reelection. What type of policies would the governor be inclined to support and why?

What happens if the government wants to lower the unemployment rate in our economy, like we are experiencing right now, how will this affect the inflation rate as well? Can the government influence both of the variables (inflation/unemployment rate) at the same time in a positive direction? What are the implications of stabilizing just one of the variables?

Explanation / Answer

Governor of Georgia can increase its spending or reduces rate of taxation. This will positively affect the residents of Georgia as their disposable income will increase and they are able to consume more goods and services.

If government wants to lower the unemployment rate then government has to increase its spending this will create employment in the economy as government spends on the construction of new buildings, bridges, etc but this will also lead to inflation in the economy. This is because increase in government spending increases the flow of money in the economy and as a result price of goods and services increases and resulted in inflation. There exist negative relationship between the inflation rate and unemployment rate. Government cannot control both at the same time. If it takes into account inflation then unemployment rate will be high and vice-versa. This inverse relationship between inflation rate and unemployment rate is called Phillips curve.

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