Economic policy and global environment Essay Example | Topics and Well Written Essays - 1500 words - 1

Economic policy and global environment - Essay Example The reduction in the government spending in 2012 has resulted in falling growth rates over the last three quarters. The shutdown of the government has greatly impacted the government spending. Though these workers will be paid their salaries retroactively, their better halves in the private sector cannot expect the same and this will lower consumption spending in the festive season. The uncertainty in the political environment is likely to affect the investments in the country, which will further result in the weaker growth. Governments Fiscal Policy: Past and Present perspective Historically, the fiscal policies, adopted by the government at state, local or federal levels, have mostly been tailwind for the economy. This implies that it has tried to boost the economy (International Monetary Fund, 2013). This has drawn references from the history that whenever the economy is in recession, the government follows an expansionary fiscal policy. This can be explained with the help of the following graph. Figure 1: Expansionary Monetary Policy (Source: Burnt Hills-Ballstan Lake, n.d.) If the government follows an expansionary policy, either by raising the level of government spending or reducing the level of the taxes, there is an outward expansion of the aggregate demand curve. This is represented by the shift of the curve from AD0 to AD1 (Burnt Hills-Ballstan Lake, n.d.). In this range of the SRAS, there is almost no effect on the rate of inflation which is measured by the price level, measured in the y-axis of the graph. The rationale working here is that during sluggish economic performance, the revenue that can be earned from taxes falls and the level of government spending has... This essay presents a comprehensive economic analysis of the effectiveness of the fiscal policy carried out by American government in 2013 year. Fiscal policy measures are the methods which are applied by the government to adjust the levels of government spending and tax rates that directly influence the growth of an economy. The fiscal policy is used in combination with the monetary policy to control the economic growth. The monetary and fiscal policies can directly affect the rate of inflation and determine whether the country will face conditions of growth or recession In designing the fiscal policies, the government has faced formidable challenges and hence, decided to reduce the level of spending. The rising age of the population, along with rising costs of health care, makes expansionary fiscal policies non-feasible in long run. The rising expenditure by the government would have soon surpassed the revenue earned by government and The analysis has revealed that the government had changed its fiscal policy from expansionary to contractionary for dealing with the recession in the present time. It has been observed that the recent federal shutdown, though for a short period, has slowed down the pace of recovery of the economy. The direct impact was the reduction of the GDP on account of the lay-off of the federal workers. The indirect impact came from the multiplier effects of the government spending cuts. The employment figures were also affected owing to the shutdown and resulted in the loss of investor confidence.