Long-range effects of stimulus plans on banking and aggregate demand

Stimulus

Discuss the long-range effects of a stimulus plan as it affects the banking sector, on the one hand, and increases aggregate demand, on the other hand.

A stimulus plan by the federal government is designed to increase aggregate demand and boost economic production, lifting the nation out of a recession. By infusing money into the economy through public works projects and other government investments, newly hired workers have more income, and can thus contribute to the expansion of the economy as a whole through their spending. However, a long-range stimulus plan can occasionally make the banking sector nervous, because of fears of rising inflation. Inflation is feared by the banking sector because this reduces the value of their current holdings, and also means that current loans will yield a less profitable dividend, as prices increase and the purchasing power of the dollar goes down. Additionally, most stimulus plans couple fiscal spending with lower interest rates. After the 2008 recessions, interest rates sank to virtually zero. Lower interest rates also make it difficult for banks to make money by lending money. However, consumers are far more inclined to wish to take out loans and spend, taking advantage of the low rates to buy 'big ticket items.' Low interest rates spur on consumer spending, particularly in the housing market and in automobile sales.

However, despite the understandable skittishness regarding increased rates, overall the banking sector supported the recent Obama Administration plan of lowering interest rates, even though some, more conservative economists have raised a their voices to call for an increase in rates, now that the economy appears to be more robust, despite lagging job growth. The difficulty of increasing jobs without overheating the economy now that there is sustained economic growth will be a tricky balancing act for the Administration.

Elaborate on how an emissions tax designed to reduce carbon dioxide will impact the macro economy in general and industrial growth and development.

Emissions taxes are seen as good for the environment in the long run. They force industries to adopt environmentally friendly techniques and to use more fuel-efficient vehicles for transportation. However, emissions taxes can be costly for industry because of the need to adopt new technology. When input costs go up, prices go up and this expense is passed along to the consumer. Increased costs of goods and services result in decreased demand, if wages remain constant. Thus, many have argued against raising the emissions tax during recessionary times.

However, there is still a clear argument in favor of raising the emissions tax, despite the potentially negative short-term economic effects. An increase in the emissions tax encourages companies to invest greater efforts in making fuel-efficient technology. A true long-term stimulus package aims to stimulate sustained economic growth, and not merely prop up failing or obsolete economic sectors.