Fiscal Policy

Fiscal Policy Simulation

Principles of Macroeconomics

Judith Grenkowicz

Corketa Martin

University of Phoenix

November 28, 2010

The government plays an additional role to its people other than creating and enforcing laws. The government also has the responsibility to encourage and promote economic growth. The fiscal policy is one way that the government can maneuver the movement in the economy. A fiscal policy is decisions made by President and Congress, usually relating to taxation and government spending, with the goals of full employment, price stability, and economic growth. In this paper the contents will discuss the effects of fiscal policy changes and will highlight the four key points from the assigned simulation.

In 2006, scenario one, Erehwon’s fiscal policy was facing a recession. Frank Smith’s concern is providing education to low-income students, while Maria Alvarez concern is to increase employment. As president, the decision was made to increase government spending for infrastructures by 300 million dollars. Increasing investments into infrastructures will provide more employment opportunities in the skilled labor workforce. After increasing the budget and investing more into low-income student education, the unemployment rate decreased from 6.32% to 4.86%.

Education is a critical issue for Erehwon but will not generate enough employment towards the laborers in the economy because of the shortage of trained faculty. While in politics popularity plays an important role, but it can’t always dictate the decisions needed to be made. Reducing taxes will increase popularity more than increasing expenditures but without increasing expenditure it will be impossible to fulfill the crucial development needs of the economy.

Having a multiplier of 5, an increase of expenditures will increase real income and output by five times the increase in expenditure. Meaning, a $1 billion dollar increase in expenditure will...