Evaluating Fiscal Policy Alternatives - Coursework Example

Macroeconomics Evaluating Fiscal Policy Alternatives Introduction The requirement of virtuous Fiscal reforms is much higher in developing countriesin comparison with the developed countries. An organization should always stick to its prime motive, what so ever that may be (for a company: profit generation, for a country / government: Economically better environment). (Collander 2004) Every government faces several problems relating economic and fiscal conditions, which could get worsened over a period of time on account of any wrong decision. High budget deficit is one of the causes of concern, that is because most of the decisions that could be made to overcome this problem might lead to an further worsening of the economic conditions, these could be higher unemployment, high tax rates, extreme inflation and could also cause a bulk debt on the country, this is what is called the errs of deficit financing. (fiscal policy, Britannica, 2008) Most of the governments in many countries willing fully make wrong decisions for the short-term advantages and increasing employment to gain the public’s favor so that they can be re-elected. This is a general temperament of politics and politicians, which is the reason why it is very hard for any government to sustain after a couple of terms. Thus, the most prior issue should be to sort out the current problem in such a manner so that in the long term the solution would prove more fruitful than the current situation. The public can be provided with a clear explanation for the government’s decisions. Even with the help of modern techniques such as the multiplier, the above reason for making wrong decisions is likely, because with the modern calculation and forecasting techniques such as multiplier and regression, it is hard to miss the long term ill effects of the decisions. Forecasting with the help of Change in Simulation Several important figures pertaining to the economy of Erehwon have been provided, which were used via the multiplier and after that a regression analysis had taken place to forecast the trend. I tried to play with several figures and the outcome was mostly a drastic increase in inflation. What I had noticed while experimenting with the figures was that the previous government had already been spending just too much money, which had lead to a tremendous increases in the budget deficit and the figures had reached to the $ 1 billion mark which was just too much for the developing country. Although the country’s infrastructural problems were not solved, the country still had a shortage of railway and roadways connectivity and the connectivity via air travel was just too out – of – reach as the country had very little connectivity with only 15 airports. Except for this there were more infrastructural issues such as just 1 phone (main line) for 1 person out of 20 people and mobile connectivity could not be presented in such figures because of the tremendous scarcity. Same is the case with internet usage, just a handful of the population uses the internet on a regular basis, although this has little to do with infrastructural expenditure and a higher weight age will be towards expenditure on educational facilities. While creating perfect economical situations we will have to consider 3 major factors in the simulation; 1. Change in the government spending on infrastructure. 2. Change in the government spending on education for low income students. 3. Change in the income tax rates. These factors are enough to control the following factors: 1. Inflation. 2. Unemployment. 3. Popularity of the government. The Simulation Year 2006 In the second year after I got elected I saw that these were really worrisome times and the unemployment rate is very high, so is the case of inflation. Good and early decisions were to be taken so as to save my reputation, so this is what I did in the 2nd year of my tenure: 1. Increased the Infrastructural investments by $ 200 million. This was executed because the main need of the country was infrastructure and development. 2. $ 100 million invested for educational development for low - income students. 3. No Change in Tax rates. Awarded Ideal President… Year 2008: Inflation problem The decisions made were bound to increase inflation, but such a drastic increase was unexpected, what worries me is that this shouldn’t have happened just before the elections. This had to be corrected as soon as possible and that is the reason I arranged to call a short and private meeting with my 2 close executives; Mr. Frank Smith and Mrs. Maria Alvarez. The quandary was that they both had seemed troubled about my popularity; well… just a year before the elections… this was and should’ve been the prime issue under consideration. Secondly, they suggested that I need to drop the income tax rates so that we could gain some popularity and correct the ill effects during my next term. But I ought to try out something new as I was less bothered about my popularity and was more concerned about the future of Erehwon. So this is what I did: 1. Decreased my investments in infrastructure and educational development by $ 200 million each. 2. Increased the Tax by 0.50 %, as we need to control the budget deficit. Year 2009 It seems my decisions proved to be fruitful as my people like me and have re-elected me. But the inflation rates have risen tremendously even after multiple efforts to control it. My advisors recommend cutting down the money spent on education of low income students due to several reasons and its ineffectiveness and wrong utilization of funds. Thus the decisions taken were as follows: 1. Invested $ 200 million more in infrastructural development so that the development gets faster. 2. Withdrawn $ 600 million worth of investments from the educational development expenditure on the basis of truthful request by advisors. 3. Decreased Income tax by 0.50 % so as to boost employment that was lost while withdrawing funds from educational expenditure (and of course to create a strong goodwill). Thus with a final popularity of 4.02 I was awarded the “well ruled” award. Changes in the Fiscal policy using the demand and supply Framework The 2 investments (expenditure on infrastructure and educational facilities0 and income tax rates radically affect the demand and supply framework. As the investment increases the demand is bound to increase and vice versa, and as the income tax rate increases the demand goes down. The motive here is to set up the expenditure and tax rates in such a way so as to bring demand and supply as close as possible or to uniform the demand and supply. For this the above solutions were perfect and the demand curve meets the supply curve at the desired point or location. Points that were accentuated in the simulation The points that were emphasized in the simulation were: 1. Multiplier fundamentals and its use in a proper and appropriate manner. (Guess, 2000) 2. Facing economic and fiscal dilemmas using appropriate techniques. 3. Forecasting strategies such as regression, etc. 4. GDP fundamentals and the fundamentals of other economic indicators such as the demand and supply themes. Uses of Techniques in simulation in Workplace Well… we could use forecasting techniques for financial decisions, using the multiplier and regression; these may be used to forecast the following in a business: 1. Demand and Supply. 2. Recruitment requirements. 3. Financial growth. 4. Successful planning (economic or fiscal) Besides the above mentioned factors, these techniques may also be used to understand the psychology and behavior of the government in terms of the government’s policies so that we may estimate when the tax rates are going to increase or any other government decision related factor. Findings: Growing Further 1. We have learned the techniques used by the government to maintain control over the economy. 2. The coaching by the simulation could be very worthy while dealing with any financial markets like the Forex, Stock market, Commodities, etc. 3. We have found out that increasing expenditure will always increase the demand, suppose a company spends its money on advertisement, so definitely the demand of the product will go up, and vice – versa. 4. Increasing tax rates would bring down employment. 5. To be a good leader you will be required to keep your company’s staff and business associates happy by not gifts and presents but hard and fruitful work. 6. A plan that succeeds in the short term is not always good. To be able to run a business or government successfully you will also be required to use various analysis techniques to forecast the long term effect of any decision. References Fiscal policy. (2008). Encyclopedia Britannica. Encyclopedia Britannica 2007 Ultimate Reference Suite . Chicago: Encyclopedia Britannica Collander, David. (2004). Economics : 5th Edition Guess, George. Farnham, Paul. (2000). Cases in Public Policy analysis. Pg. 140 Read More