Fiscal Policy Simulation

Essay by savanahbaby December 2006

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The Fiscal Policy Stimulation is designed to show how the impact of a change in government spending and taxes affects the real Gross Domestic Product and income of the economy. Students are asked to play the roll of President of a small country called Erehwon. Erehwon is rich in mineral deposits and has a suitable climate for agriculture. Exports include fresh fruits, vegetables, processed foods, iron ore, bauxite and manganese. The underdeveloped industries are mining and processed foods. Tourism is a possible industry but certain improvements in the transportation and communications are needed to maximize that industry. The country lacks sufficient infrastructure such as roads and railroad. These are a necessity to connect the different cities. The country is also in need of ports for shipping, an efficient banking system, and communication infrastructure. The issues that the President is faced with include: achieving economic growth, restraining government spending, developing adequate infrastructure and encouraging private enterprise.

The Government History encompasses high budget deficits with weak infrastructure. The weak infrastructure is a problem since this is unfavorable for foreign investors. Education is a concern since the literacy level for males is 56% and only 35% for females. The country is facing a recession, unemployment is high, incomes are falling and public confidence needs to improve.

In the first year I succeeded in putting the economy on the right track. The changes I made in government expenditures and or taxation will help the economy achieve its potential output in the long run. My decisions also led to an increase in my popularity. My policies led to an increase in real gross domestic product and therefore to an increase in real income and a fall in unemployment.

In year 2xx8, my fiscal policy decisions will have an impact on the real income and real...