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Fiscal Policy, Monetary Policy, And A Healthy Gross Domestic Product

1773 words - 7 pages

Economic Health/Fiscal Policies and Federal Reserve/Monetary Policies Paper
Understanding Gross Domestic product is central for understanding the business cycle and the progression of long-run economic growth (Hubbard & O’Brien, 2011, p. 631). The GDP is defined as the value-added of all goods and services produced in a given period of time within the United States (2008). The GDP is widely used as an gauge economic wellness and health of the country. What the GDP represents has a hefty impact on nearly everyone within our economy. As an example, when the economy is healthy, you will usually see wage increases and low unemployment as businesses demand labor to meet the increasing economy. The government has two types of economic policies used to control and maintain a healthy economy, fiscal policy and monetary policy. When economic growth is healthy it will have a positive on both individuals and businesses.
The Use of the GDP to Measure the Business Cycle
The fluctuations of economic growth are known as the business cycle. The GDP is a useful indication and measurement of the fluctuations of economic contractions. The measurement of GDP can be approached from three angles: value added by industry, final expenditures, and factor incomes (2008). The first angle measures the value added created by industry; the output less and inputs purchased from other producers. The second angle measures expenditures by consumers, businesses on investment goods, government on services and goods, and foreigners for exports; minus expenditures by domestic residents on imports. The last angle measures incomes generated in production, operating surplus generated by business and compensation of employees (2008). The GDP does not remain constant and will change for many reasons, economic and non-economic. Economic reasons include changes in government policies such as interest rates and taxes. Non-economic reasons can include factors such as drought, war, man-made and natural disasters. When the economy expands: unemployment decreases, inflation begins to increase and the real GDP rises. In contrast, when the economy contracts: unemployment increases, inflation decreases and the GDP falls.
Role of Government Bodies in Determining National Fiscal Policies
Fiscal policy is the use of a government’s taxing, debt, and spending authority for the purpose of influencing economic growth. Congress and the president share responsibility for economic policy with the Federal Reserve (Hubbard & O’Brien, 2011, p. 929). The government can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending (Hubbard & O’Brien, 2011). The government uses fiscal policy to make changes in government purchases and taxes, to achieve policy goals. The price level and the levels Gross Domestic Product and total employment in the economy rely on the collective demand and short term aggregate supply. The government can both...

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