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If consumer demand falters, that will have two other multiplier effects. The first is that businesses will reduce their investment. Businesses typically invest when they feel that demand is rising. Increased unemployment, combined with lower levels of government and business spending, will instead cause aggregate demand to fall. If business investment falls, that will have further impacts on unemployment. This will create a negative feedback loop -- a multiplier effect in the wrong direction for the U.S. economy.
Additionally, when consumers and businesses are spending less, the government will receive fewer taxes. That will cause government to spend less, one would like to think, again continuing the multiplier effect and driving GDP down so far that we enter a recession.
The one interesting thing is that such a scenario would likely see imports decrease because fewer people and businesses...
A strong enough recession could impact the price of crude oil, further lowering imports. Exports would likely increase, however, as American companies would look more to foreign markets to replace the income they are now not getting from the domestic market. So while the balance of payment might improve slightly under the fiscal cliff scenario, this improvement will not nearly be strong enough to overcome the multiplier effect on the other three key driving forces of GDP. This concern over recession is well-founded economically, and as a result the concern for the health of American politics, specifically the ability of the politicians to make a deal to avoid the fiscal cliff, is also well-founded.
Works Cited:
Sahadi, J. (2012). What Obama's win means for the fiscal cliff. CNN. Retrieved November 9, 2012 from http://money.cnn.com/2012/11/07/news/economy/obama-win-fiscal-cliff/
Works Cited:
Sahadi, J. (2012). What Obama's win means for the fiscal cliff. CNN. Retrieved November 9, 2012 from http://money.cnn.com/2012/11/07/news/economy/obama-win-fiscal-cliff/
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