ECON 21 Principles of Microeconomics

Every other week you will be asked to review a recent publication (generally within the past six to twelve months) - such as a news article. podcast, book, movie, interview, etc. — on a topic related to our studies. For Week 6 select an article related to one of the following topics from our studies of the past two weeks of class: 

• Monetary Policy - Assess the actions taken by the Federal Reserve Board this past year. What have been the main determinants of the Fed's Policy decisions? What risks do their decisions pose based on your article's analysis?

 

• Interest Rates - How have interest rates affected some of the various segments of the economy ( i.e. housing, construction, retail purchase of big ticket items such as autos and appliances).

 

• savings & Investments - Article analyzing the macro impact of savings given the level of interest rates. What direction have household savings been moving? How does this compare to the level of household debt?

 

• Fiscal Policy - Articles related to the federal budget, taxes, entitlements or deficit spending.

 

• Crowding Out Effect - Given the size and prolongation of deficit spending and debt accumulation, how has this affected the availability of funds accessible to the private sector for investment? 

Introduction

The study highlights on the US economy’s fiscal policy that is analyzed based on the article related to federal budget, taxes and deficit spending. Fiscal policy refers to the changes that the government of the respective nations makes  in their federal budget for influencing the growth of the economy. Fiscal policy is classified in two types- expansionary and contractionary fiscal policy. Expansionary fiscal policy refers to the policy that the government adopts during recession that aims in increasing aggregate demand through rise in government expenditure or decline in taxes (Afonso & Sousa, 2012). On the contrary, contractionary fiscal policy is  implemented during inflation for decreasing aggregate demand through reduction in government expenses or rise in taxes.

Articles related to Federal Budget, taxes, deficit spending in US

The articles relating to federal budget of US reflects how the budget prepared by present president makes cuts in the nations program. This article highlights that not all the departments will suffer from the budget proposal of Donald Trump that covers $1.1 trillion of discretionary expenditure for the year 2018, $52 billion for defence department and $2.8 billion for security department. In addition, the budget proposal also reflects that additional amount of $1.5 billion will move towards transport and illegal immigrant’s removal (Corsetti et al., 2013).  In order to build –up the defense sector of the economy, the president slashed their budget in other sectors also. However, there would be reduction of 16% in Health and Services department, 14% in Education department and 29% in State department. Therefore, it is predicted that this budget proposal will keep the expenditure at same level. As US has recovered from recessionary period, this federal budget will influence on the total aggregate demand of the economy.

The article on US tax reflects that Donald Trump has unveiled plan for overhauling tax system of this economy. The tax proposed by US president highlights proposal of tax reduction for corporations as well as individuals.  Implementation of tax cuts will not benefit the wealthier individuals in this country (Afonso & Sousa, 2012). Moreover, this will seek in facilitating poor families owing to increase in credit for child tax. In addition, tax reduction in corporations from 35% to 20% will improve their business productivities and profitability level.

The deficit spending of federal government records to $668 billion in this year.  Recent study reflects that there has been $82 billion increase in spending from the last year. This deficit increased to 3.5% of this nation GDP in this year. It is well known that deficit higher than growth of  US economy adds to nations debt burden and leads to rise in borrowing cost. This article highlights that social security spending increased to $29 billion and spending in health sector rises to $ 22 billion. Thus, US president implements this expansionary fiscal policy in order to decrease unemployment level and enhance economic growth.

Economic Analysis

Fiscal policy influences the capital markets in two ways – Government expenditure and tax policies. It helps in generating budget deficit or surplus that in turn reflects that the government of the particular economy contributes in either financing investment or private investment. Moreover, the impact of fiscal policy also influences interest rates, levels of deficit, personal as well as capital expenditure and is usually linked with monetary policy. In US, federal fiscal policy has been basically countercyclical. US government expenditure generally arises during the period of economic downturn. The disparity between government expenditure and revenue tends in leaning against fluctuations in business cycle. The countercyclical characteristics of fiscal policy occur in part with the help of automatic stabilizers. When the US economy fell into recession, government expenditure on programs namely unemployment insurance rises, as more people in US need financial assistance. The present state of fiscal policy adopted by federal government helps in mitigating the effect of financial crisis in the US economy.

Conclusion

It can be concluded from the above report that fiscal policy adopted by government helps in determining allocation of funds in various sectors. It plays a vital role in influencing the direction of the economy. The budget prepared by US Federal government and their activities regarding taxation as well as spending helps in stabilizing economic growth of this nation.

References

Afonso, A., & Sousa, R. M. (2012). The macroeconomic effects of fiscal policy. Applied Economics, 44(34), 4439-4454.

Corsetti, G., Kuester, K., Meier, A., & Müller, G. J. (2013). Sovereign risk, fiscal policy, and macroeconomic stability. The Economic Journal, 123(566).