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Policies and Practices that Affect the Economy

The policies of the federal government influence the outcomes of the various activities in that economy. When government policies change or unplanned events occur, the resulting economic events or activity will usually change. Listed below are several policies or events that affect the performance of the economy:

The federal government employs a budget plan over several fiscal years that results in significant increases in the national debt, with no relief or plans to deal with the problem.

The federal government enacts new tariffs and quotas on all imports.

The general public loses confidence in their leadership, in terms of their ability to manage the economy, especially in the area of job creation.

The federal government, in an effort to stimulate the economy, decreases taxes on all individuals except those earning over $250,000 per year.

The level of investment decreases because of a lack of confidence in the economy.

Interest rates are kept artificially low by the Federal Reserve for several years.

Required:

For each of the items above, describe what would be the likely outcomes in the economy. Use the appropriate tools of analysis, such as aggregate demand and aggregate supply where appropriate, to justify and explain your answer.

Solution Preview

The federal government employs a budget plan over several fiscal years that results in significant increases in the national debt, with no relief or plans to deal with the problem.

The Federal Government budget plan means more spending. This means the federal government spending has increased during the years. The increase in spending leads to an increase in aggregate demand. In response to an increase in aggregate demand the federal government expects that there will also be an increase in aggregate supply. That is the aggregate supply curve will move to the right. Specifically the output will increase leading to higher investment in capacity and an increase in employment. The likely outcome is that in the short term the employment level will increase. The income in the hands of the people will increase. In the long term additional debt means higher taxes. The future generations will be burdened with debt.

The federal government enacts new tariffs and quotas on all imports.

The effect of new tariffs and quotas on all imports will lead to higher prices of imports and lower imports. This is protection of local industries. In the short run the likely outcome in the economy will be protection of jobs in the US based industries. The sales of goods of US industries will be protected. The outcome will be that at least in the short run the US firms that are protected will not ...

Solution Summary

The response provides you a structured explanation of federal government influence on the economy. It also gives you two relevant references.

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