The policies of the federal government influence the outcomes of the various act

Question

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.

Explanation / Answer

Effects of the specified policy changes are stated as follows.

(1) Budgetary increase of national debt will result in a huge budget deficit . this signifies that government has increased its expenditure without raising revenue (taxes), instead, funded the expenditure by borrowing.

This will result in a lower GDP. As more debt is incurred, interest servicing increases, causing a debt spiral. Higher debt taken by government will increase the interest rate, which will dampen private investment in the economy.

(2) New import tariff or quota will increase the cost of imports, therefore import demand will decrease. Net exports will increase and GDP will increase as well.

(3) Loss of public confidence on job creation will erode the consumer confidence index, which will create apprehension about reduction in unemployment rate and public will consume with discretion. Consumption spending will decrease, GDP will decrease.

(4) Reduction in taxes will increase disposable income, therefore increase consumption demand and consequently, GDP.

(5) Reduced investment will reduce the GDP.

(6) If Fed keeps interest rates artificially low for several years, investment will get a boost for quite a few years, thus stimulating the economy and increasing GDP.

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