It is the role of the federal government therefore to keep inflation low as well as keeping unemployment rate down. Philips curve gives the probability of having both a low unemployment and inflation hence providing the stakeholders in the sector in the short run a tradeoff between unemployment and inflation (Mark & Asmaa, 2012). Unemployment can be kept under control by the government while at the same time allowing inflation OR to keep controlling prices and not controlling unemployment. This compromise between the two is shown as a contra-relation between inflation and unemployment. In the long run, the government can only afford to play around with inflation while having zero control ...view middle of the document...
Through the expansionary fiscal policies the unemployment rate will drop below the natural rate in the short run but in the long run it will be restored back to its original level. The other tool is to use the exchange rate to avoid the inflations but this one is only possible with an open economy. It has been found that countries with a currency value relatively higher in comparison with other countries have less chances of being affected by inflationary pressures. A check on their exports due to their high pricing could be the most likely reason. This will behave as a check on the purchasing ability of the people and therefore controlling inflationary pressure indirectly. However it is less likely to be used because of its other adverse consequences.
EXPANSIONARY POLICY AND FISCAL DEFICIT
part one is categorical that in order to raise the economy and GDP levels the president and federal government will have to apply both monetary and fiscal policy that are complement of each other. A fall in the FED rate increased government spending, improved welfare spending, a drop in both FED and tax rate all works together to overturn balance between government spending and its
revenues from taxes . This tool is a prototype of Keynesian findings, which states that the
economy can improve if the effective demand is improved. A rise in government spending which is a part of aggregate demand together with lower taxes is expected to raise aggregate demand which in turn raise GDP.
The theory of Keynes argue from multiplier perspective for the change in G/ T to affect GDp. Increase in GDP has a multiplied effect on GDP since the rise in G < rise in GDP. Similar to that a unit drop in tax rates will cause GDP to go up by the amount shown by the tax multiplier (= MPC/ MPS > 1). A fiscal deficit is therefore often a fall out of an expansionary policy followed in a recession to restore the economy to natural levels. The ratio of debt to GDP goes up as debt also goes up while GDP drops, as per Reddy (2012) Public debt in advanced.
EFFECTS OF FISCAL DEBT
A fiscal debt is a situation whereby the government is spending more than it is generating from the revenues. This deficit can be met by either government printing more money or from borrowing. The first one will increase the...