Fiscal Policy Effects of Fiscal Policy Suppose

¶ … Fiscal Policy

Effects of Fiscal Policy

Suppose the government imposes tax cuts for 95% of all households. How does this affect Wal Mart?

The impact of tax cuts on households will result in an increase in spending. This is because families will have more disposable income available (which can be used to purchase a variety of goods and services). Over the years, this policy has been utilized to stimulate economic growth. A good example of this occurred in 1964, when Congress enacted 18% tax cuts to spur consumer spending. The results were that the economy showed consistent levels of strengths throughout the 1960s. ("Do Tax Cuts Stimulate the Economy," 2010)

In the case of Wal Mart, this will lead to an increase in profit margins, sales and earnings. The reason why, is because the firm is one of the largest discount retailers in the world. The fact that the economy has continued to remain stagnant, will result in more consumers choosing to spend their additional income at the company's numerous retail stores. (Farfan, 2009)

Evidence of this can be seen by looking no further than same store sales for the first quarter of 2009. At the time, the federal government was reducing tax rates in an effort to stimulate the economy. This had a positive impact on Wal Mart (which realized a 2.5% increase in same store sales). As a result, these figures are indicating how the company benefited directly from tax cuts (with consumers spending a percentage of their additional income at these locations). (Farfan, 2009)

Trade policy is also an important tool for the government in regulating exports and imports. Give an argument for or against trade in terms of what would benefit your firm. Explain your reasons.

Free trade policies will provide Wal Mart with significant benefits. This is because Wal Mart has been continually focused on offering customers with the lowest prices anywhere. When there are liberal trade programs in place, it will help the firm to be able to have access to cheaper products overseas. The reduced trade barriers are making it easier for the firm to find even lower costs for purchasing an assortment of goods. (Freedman, 1997)

Evidence of this can be seen with observations from renowned economist Milton Freedman who said, "We cannot eat, wear, or enjoy the goods we send abroad. We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets. Our gain from foreign trade is what we import. Exports are the price we pay to get imports. As Adam Smith saw so clearly, the citizens of a nation benefit from getting as large a volume of imports as possible in return for its exports or, equivalently, from exporting as little as possible to pay for its imports." (Freedman, 1997) These figures are showing how free trade is providing consumers with the products and services they demand.

As a result, Wal Mart is benefiting from free trade by having access to cheaper imports (which can be sold to consumers at a discount). This is addressing the demand of customers and it is ensuring that Wal Mart is able to maintain their discount-based model. The combination of these factors will mean that the company will see an increase in sales and earnings (from the implementation of free trade principles). (Freedman, 1997)

Using the material from the case assignment, would the implementation of a tariff be considered expansionary or contractionary fiscal policy? Explain.

The increase in tariffs would be considered to be contractionary. This is because any kind of increase from one trading partner will result in similar kinds of actions from the others. Over the course of time, this will result in a reduction in commerce. This will have a negative impact on consumers by increasing wholesale and retail costs. Once this takes place, is when many households will cut back on their spending (which will cause the economy to slow). ("Hawley Smoot Tariff," 2012)