Fiscal Policy Simulation
Fiscal Policy Simulation
Government officials play a vital role when it comes to the economy. Decisions that are made determine economic growth or an economic recession. Understanding the economic indicators and how changes in one affects another is important when determining the correct fiscal policy to implement. The challenge is to establish and maintain a growing economy while controlling indicators such as inflation and unemployment, which have an inverse relationship with one another. Governments face these dilemmas everyday, and decisions are not easy because of the ever changing conditions of the economy.
For the year 2XX6 scenario, the government was faced with finding ways to avoid a recession while not allowing the budget deficit to increase to more than five percent of the Gross Domestic Product (GDP). To counteract a possible recession, the government implemented a fiscal policy to increase government expenditure on infrastructure projects by $300 million dollars. This measure increased the budget deficit from 2.5 to 3.25 percent. However, the real GDP of the economy increased from 39.7 billion to 41.2 billion, which is close to the economy's long-run potential output. This decision also increased the president's popularity because inflation remained constant at five percent, while unemployment dropped from 6.32 to 4.5 percent.
In the president's fourth year in office, he along with the government must enact a fiscal policy to drive down rising inflation. Implementing a deflationary policy would reduce incomes in the economy. To combat the high inflation, which was at 10.41 percent, the income tax rate was increased by 3.5 percent. As a result, inflation dropped to 5.16 percent and unemployment increased from 3.53 to 4.43 percent. The income tax increase will increase income tax revenue by $700 million, while leading to a real GDP of $41.26 billion, which is very close to the economy's long-run potential output...
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