Fiscal Policy Alternatives Simulation

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Fiscal Policy Alternatives

Eden Jack

University of Phoenix



Fiscal Policy Alternatives

The country of Erehwon has a population of 30 million and a total land area of 440,500 square kilometers (University of Phoenix). As newly elected President, I will be making some fiscal changes in the hopes of improving our economy. Our country is currently facing the issues of slow economic growth, excessive government spending, inadequate infrastructure, and the need to promote private enterprise. The fiscal policy decisions I make this year will have an impact on the real income and real gross domestic product of our economy. My main goal is to reduce inflation while cutting government spending except in the areas of infrastructure.

The existing policy the Erehwon government has is for spending and taxing. Our fiscal policy directly affects tax rates, interest rates, and government programs that influence prices.

One thing that the country of Erehwon has to keep in mind is the Permanent Income Hypothesis. This hypothesis states that "the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer-term income expectations" (Answers Corporation, 2009). The people of Erehwon will save more money in periods of high income and dip into savings to increase consumption in periods of low income.

In the first two years of my office, I have increased government spending on infrastructure by $200 million and decreased income taxes by 1.5% which decreased tax revenue by $300 million. Although these actions have improved my popularity by 2.53%, it has also increased the inflation to 12.69% and the budget deficit to 3.71% of GDP. My policies have led to a real GDP of $42 billion, which is much more than...