The Economy And Fiscal And Monetary Policy Essay

Length: 2 pages Subject: Economics - Inflation Type: Essay Paper: #40239750 Related Topics: Government, Government Spending, World Economy, Interest Rates
Excerpt from Essay :

An Economic Simulation: Econoland

Q7. What government expenditure decisions did you make during different phases of the simulation? How do changes in government spending affect the consumption level?

During the first and second years of the simulation, I kept corporate and individual income tax rates too high to sustain economic growth, and also kept the interest rate too high at 3% and then raised it to 7%, which discouraged borrowing for new investments. When the world economy slowed down, this further discouraged consumption. Lowering the interest rate by the third year was helpful, even with raising income and corporate taxes. Reinvesting the gains from such taxes into government infrastructure can be very helpful to further encourage spending by consumers and businesses. By the fourth year, despite the instability in the world economy, the lack of a budget surplus, government reinvestment in the economy, and keeping the interest rate stable resulted in continued growth.

But by the fifth year, by keeping government spending constant in a world where inflation is a significant factor, combined with a budget surplus, growth had slowed. This should have been a sign for a need for higher levels of government spending. Inflation means that the purchasing power of the same…banks must keep on reserve to avoid bank runs, can also be helpful. This ensures that banks can lend more money, and have more money circulating in the economy. The central bank can also lower the discount rate, or the rate banks charge to lend money to one another to meet reserve requirements and for other reasons, to ensure that consumers and businesses who want to borrow and spend money for various goods and services have the means to do so. Finally, the government can buy up treasury notes, further infusing liquid cash into the economy, rather than encouraging consumers to save…

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