Eco/360 Fiscal Policy Simulation Essay

866 words - 3 pages

"Even in free market economies, governments have an important role to play in keeping the economy on the growth path, and dealing with inflation and recession." The fiscal policy simulation was offered to provide the students with an environment in which to make fiscal policy decisions and study the outcomes. The purpose of this paper is to explain the effects of changes in fiscal policy, identify four key points presented in the simulation, apply the lessons to the workplace, and describe the growing further results. After reading this paper, the audience should understand how the simulation enables the user to better comprehend government uses tools in fiscal policy to put the economy back on track.Effects of Changes in Fiscal PolicyWhat were the effects of the changes in fiscal policy in the simulation? In the first scenario of the simulation, Frank, the Director of the Budget Office, states, "We have to increase jobs in the economy and improve overall confidence in the future of the economy." Keeping this in mind, I opted to increase government spending on infrastructure by $300 million, decrease spending on education by $100 million, and reduce income tax rates by 0.5%. The effects of fiscal policy in the simulated year of 2xx6 shrank the unemployment rate from 6.32% to 4.62% and improved popularity from a score of 3.2 to 3.68. For this scenario, the changes in fiscal policy brought positive results to the economy of Erehwon. (See Table 1.)The second scenario begins with the announcement of an inflationary problem in the economy. The scenario specifically states, "In the fourth year of office it has been decided to use fiscal policy measures to bring inflation down, which means reducing incomes in the economy." I decided to cut government spending on education by $600 million and increased the income tax rate by 1%. These measures resulted in an increase in tax revenues by $200 million, a reduced budget deficit by 2.1% of GDP, a sustainable GDP that is close to the long-run potential output. Inflation, the main priority, was reduced due to lower price levels in the economy. In an effort to reduce the inflation rate, I had to trade off with an increase in unemployment. According to the simulation, I could have managed my popularity better since my fiscal policies consequentially caused the popularity score to drop from 3.68 in the first simulation to 3.45 in the second. (See Table 2.)The third scenario asks, "Which components of fiscal policy will you use to fight recession?" In answer to the posed question, I increased the federal spending for education by $200 million and decreased the income tax rate by 0.5%. The decrease in the income tax rate resulted in a decrease in income tax revenues of $100 million. My efforts were rewarded with a reduction...

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