Fiscal Policy Simulation

Essay by HYPERSDTUniversity, Bachelor'sA+, March 2007

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The Fiscal Policy Simulation assignment explains the effects of changes in fiscal policy, identify four key points presented in the simulation, apply the lessons to the workplace and describes the growing further results. The simulation covers fiscal policy the impact of a change in government spending or taxation on the real Gross Domestic Product (GDP) and aggregate income of the economy.

In my first decision of the simulation, the Director of the Budget Office, Frank, said to increase jobs in the economy and expand overall confidence in the future of the economy. I chose to increase government spending on infrastructure by $300 million and decreased spending on education by $100 million and reduce income tax rates by 0.5%. The effects of fiscal policy in the simulated year of 2xx6 decrease the unemployment rate from 6.32% to 4.62% and improved popularity from a score of 3.2 to 3.68. For this decision, the changes in fiscal policy resulted in positive for the economy of Erehwon.

My second decision began with a message of an inflationary problem in the economy. The situation specifically states, "In the fourth year of office it has been decided to use fiscal policy measures to bring inflation down, which means reducing incomes in the economy." I decided to decrease government spending on education by $400 million and increased the income tax rate by 1%. These measures resulted in an increase in tax revenues by $200 million, a reduced budget short fell by 2.1% of GDP, a GDP that is close to the long-run potential output. The fiscal policy tools implemented to bring about these changes were: Government spending on infrastructure, Government spending on education programs for low-income students and changes in income tax rates. The outcomes presented themselves in Real GDP, Inflation, Unemployment, Budget Deficit, and Popularity Indicator...