Explore BrainMass

Assume that the economy is already in a recession

Assume that the economy is already in a recession, and both the President and Congress have decided to do something to restore the economy. Both agree that lowering taxes would not be a good idea, but do believe that it is in the best interest of the economy to increase government spending in defense, education & infrastructure.

The President and Congress change the budget accordingly, but after 18 months, GDP only increased by three quarters of the expected amount. What factors might be responsible for this situation?

Write a paper answering the above questions.

Objective: Identify current trends in macro and microeconomics.
Analyze the relationship between fiscal and monetary policy in an open economy.
Critically analyze the role of government in a market economy.
Use effective communication techniques.

State the tools of fiscal policy .and how they are used to reduce inflation or eliminate a recession. The tools are used to establish the Federal Budget on the federal level. .There are limitations to using fiscal policy. Chapter 10 provides a discussion on the limitations of fiscal policy, Each tool has effects on the performance of the economy Any tool could have a negative feedback The textbook states several issues concerning government policy.

1) the role of fiscal policy is stabilizing the economy "Should the FED focus on only inflation", page 367-368

2) Should we balance the Federal Budget? See pages 361-360-362.

3) Do (government) deficits lead to inflation? Page 362-363.

4) Limits to Stabilization Policy, pages 214-216. State the reasons that policy did have the intended effects.

Solution Preview

Gross Domestic Product


Gross Domestic Product can be defined as the market value of all the final goods and services produced during a year in the domestic economy. It includes the income earned locally by the foreigners minus the income earned abroad by the nationals. GDP determines the national income of the country. In the given situation, the US has been experiencing a slow growth rate in GDP. Private consumption, government expenditure on final goods and services, investments by business and the gross exports and imports are the key components of GDP. Any slump in these components could lead to a fall in GDP (Cherunilam, 2005).

GDP is important as it is used to determine the pace of economic growth, compare the sizes of economies and assess the relative growth rate of economies throughout the world. The fiscal policy is considered as a government policy, which is concerned with the increase in revenue through taxation and deciding the level and pattern of expenditure. It controls or influences the economic directions of a country through changes in the government taxes and the government spending. On the other hand, the monetary policy regulates the money supply or credit in the economy in order to achieve the desired policy objectives like control of inflation, specific level of employment, growth in economy, etc. It makes effort to stabilize the economy by ...

Solution Summary

The response addresses the queries posted in 894 Words, APA References