Simulation What Were the Effects

Simulation

What were the effects of the changes in fiscal policy in the simulation?

The simulation shows that increases in government spending, increases in spending on education and lowering tax rates will all increase real GDP. The impact of increasing government spending is greater than the impact of decreasing tax rates because the multiplier for government spending is greater than the tax multiplier. Aggregate demand shifts to the right causing price levels to rise. The amount of fiscal stimulus has constraints such as budget deficits being an acceptable level of GDP. And, popularity of expansionary fiscal policy actual decreases as budget deficits and inflation rise above certain levels. At this point, the economy is overheated and the government will need to cut back on either government spending or increase taxes to return the situation back to equilibrium.

List four key points from the reading assignments that were emphasized in this simulation.

Government fiscal policy uses either taxation or government spending including government spending on education to control business cycles. In cases of recession, expansionary fiscal policy will be useful..

GDP = consumption + investment + government spending + (exports imports). A cut in taxes that increase consumption and/or an increase in government spending increases GDP.

When the government stimulates the economy through fiscal policies, increases in aggregate demand exceed increases in aggregate supply. This in turn leads to an increase in the price level and real GDP, resulting in inflation.

When people have more money to spend because of government fiscal stimulus, the demand for goods increases. Production increases to adjust supply to meet this increase in demand and unemployment falls.

3) How can you apply what you learned from the simulation to your workplace?

Employers need to follow government fiscal policy to monitor how their own operations should adjust to economic conditions. Unemployment occurs when prices and wages do not fall in face of excess supply of labor and goods because they are rigid and adjust slowly. Therefore, in the short run, businesses have to decrease production. In the long run, all prices are wages are flexible so that the markets achieve equilibrium. Businesses can lower wages and decreases their prices. Wages decline until the surplus of labor is gone. And, prices decrease until the fall stimulates demand for goods. Eventually there is full-employment production.