Intermediate Macroeconomics / Managing the Economy: August Coursework: California's Fiscal Rules - Essay Example

Download file to see previous pages... The budgets are known to have created undesired effects to the livelihood of people and institutions in this state of the United States of America. There are many known causes of the successive deficits in the economy of the state of California. One of the known causes of the continuous deficits was a drop in the revenue of the state. For example, it is known that in the year 2008, the revenues of the state dropped by $15 billion which was gross. This decline was attributed to reduction in taxes such as personal, corporate among others. The other cause of the deficits in the economy of the state of California is connected to the state employees' salaries as well as benefits. The employees of the state of California have been experiencing growth of their salaries and benefits especially during times when economic boom occurs which has been creating a negative impact to the state's economy. The deficit in the economy of California is usually very sensitive since it forms a big part of the United States of America's economy. This forms a 13% of the USA's gross domestic product which is quite significant. This also affects the USA's gross state product to the tune of $1.9 trillion. This forms the biggest amount for one state as experienced in the year 2011. With the deficits in the state of California, this constitutes 30% of the entire deficit in the economy of the United States of America which is quite substantial. ...
The Mundell-Fleming model is also known as the extension IS-LM model. The Mundell-Fleming model runs away from the IS-LM model through its trait of leaning towards an open economy setting unlike the IS-LM which addresses a closed economy (Asada 2003). This model incorporates nominal exchange rates, interest rates and output in the presentation of the short run relationship with an economy unlike the traditional IS-LM model which uses only the interest rates and the output. According to this Mundell Fleming model, for the state of California to achieve a no deficit budget, there is need to make some adjustments to some of the economical beliefs. The major thing that this model advocates for is that an economy cannot operate on fixed exchange rate, free capital investment as well as monetary policy which is independent. To operate on a deficit budget, the state has to ensure that the various aspects of the economy are operated in a more careful way. According to Argy (2013), the authorities have to ensure that GDP, consumption, physical investment, government spending, money supply, price level, interest rate, money demand and taxes are operated at adjusted levels. These are the variables which surround the Mundell Fleming model. I f the variables are kept at standard levels, the state of California will operate at a balanced or surplus budget. To achieve a balanced or no deficit budget, there is need for the authorities to ensure that the economy tries to operate at a level where the gross domestic product is equal to the total of consumption, investment, government spending and exports. This is one of the things that the IS factor advocates for which is the basis of ...Download file to see next pagesRead More