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Economic analysis - Assignment Example

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Fiscal policy refers to the means by which the government adjusts its expenditure levels and tax rates so as to monitor and influence its economy. The aggregate supply and…
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Economic Analysis s Economic Analysis Introduction In this article, the key issues discussed revolves around the effect of fiscal policy to the economy of US. Fiscal policy refers to the means by which the government adjusts its expenditure levels and tax rates so as to monitor and influence its economy. The aggregate supply and aggregate demand model are very crucial for analysis of the economy. This model analyses the supply of goods and services a nation can produce in a given period and the corresponding amounts of goods and services that will be purchased at all possible levels. The Fiscal policy is thus important since it has a stabilizing effect on the economy of any nation.
Fiscal Policy
For the past few years, economists surveyed by NABE have concluded that fiscal policy uncertainty including efforts to rein in the deficit was constraining economic growth. However, the survey released on Monday has indicated that 57% no longer believed uncertainty was holding back the recovery. On the other hand, 38% of the citizens thought the fiscal policy was restraining the recovery compared with 80% in March 2014. According to NABE survey, almost half of the respondents believe the current fiscal policy to be about right. The rest of the respondents are divided with about a fourth indicating it is too stimulative and the other fourth too restrictive (Davidson, 2015).
The Federal Research officials Janet Yellen and Ben Bernanke have warned that restrictive fiscal policy creates headwinds for recovery rather than supporting it as it did during previous economic downturns. Bernanke said that excessively tight near-term fiscal policies have tremendously been counterproductive. The economists have also differed on the current shortfall with 44% criticizing it on excessive spending, 28% blaming it to the output gap, and 24% citing insufficient revenues. A quarter of the economists suggested that the Fed should raise interest rates this year. About 9 percent of them except the rate increase to occur within the first six months (Mankiw, 2014). On the other hand, two-thirds of the economists expect rates to rise during the second part of the year while a quarter believe that the Fed will keep policy on hold until 2016.
Aggregate Demand and Aggregate Supply
In the United States, inadequate demand has tremendously constrained activities in the economy of US which has caused repeated downgrades to growth forecast. The current financial crisis and ensuing recession have put the productive capacity of the nation’s economy on a lower and shallower direction than the ones in the previous years. It is estimated that the potential GDP in late 2014 was about 7% below the trajectory that was predicted some years back. However, there has been arguments that a significant portion of the damage to the supply side of the economy probably was endogenous to the weakness in aggregate demand (Mceachern, 2009).
Conclusion
In a nutshell, fiscal policy is very relevant when it comes to allocation of funds. This may be informed of taxation and spending. Allocation heavily depends on tax collection and the government using the revenue for specific purposes. It is therefore important to every nation every nation to have a fiscal policy. On the other hand, aggregate supply and aggregate demand model is also relevant for every nation as it can show the relationship between overall price level and the quantity of goods and services produced by that nations suppliers.
References
Davidson, K. (2015). Fiscal Policy Is No Longer a Drag on the U.S., Business Economists Say. Retrieved from http://blogs.wsj.com/economics/2015/03/09/fiscal-policy-is-no-longer-a-drag-on-the-u-s-business-economists-say/
MANKIW, N. G. (2009). Principles of economics. Mason, OH, South-Western Cengage Learning.
TUCKER, I. B. (2011). Economics for today. Mason, OH, South-Western Cengage Learning.
BLÉJER, M. I., & CHU, K.-Y. (1989). Fiscal policy, stabilization, and growth in developing countries. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=449370
MCEACHERN, W. A. (2009). Economics: a contemporary introduction. Mason, OH, South-Western Cengage Learning.
Appendix
Figure 1: Fiscal 2015 Budget
Figure 2: Aggregate Supply-Effective Demand Model
Figure 3: Fed forecasting Read More
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