The Policies Of The Federal Government Influence The Outcome

The Policies Of The Federal Government Influence The Outcomes Of The V

The policies of the federal government influence the outcomes of the various activities in that economy. When government policies change or unplanned events occur, the resulting economic events or activity will usually change. Listed below are several policies or events that affect the performance of the economy: The federal government employs a budget plan over several fiscal years that results in significant increases in the national debt, with no relief or plans to deal with the problem. The federal government enacts new tariffs and quotas on all imports. The general public loses confidence in their leadership, in terms of their ability to manage the economy, especially in the area of job creation. The federal government, in an effort to stimulate the economy, decreases taxes on all individuals except those earning over $250,000 per year. The level of investment decreases because of a lack of confidence in the economy. Interest rates are kept artificially low by the Federal Reserve for several years.

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The dynamic nature of macroeconomic policy and its profound impact on economic outcomes is vividly illustrated through various federal government actions and policies. Each policy not only influences immediate economic conditions but also shapes long-term growth prospects and stability. Understanding these effects requires a thorough analysis using foundational economic tools such as aggregate demand (AD), aggregate supply (AS), and other macroeconomic indicators.

Government Budget and National Debt

The federal government’s long-term budget planning, which results in significant increases in national debt without clear relief strategies, has profound implications on the economy. An expanding national debt often leads to higher interest payments, crowding out private investment. According to Blanchard, Illing, and Jézéquel (2019), increased government borrowing can elevate interest rates, thereby reducing investment in productive sectors. In the context of aggregate demand and supply, high public debt may lead to increased interest rates, which can shift the AD curve inward, dampening economic growth. Conversely, if government borrowing sustains fiscal stimulus during downturns, it can temporarily shift AD outward, boosting output and employment. However, persistent debt accumulation without credible repayment plans risks fiscal sustainability, potentially leading to higher inflation or fiscal crises.

Imposition of Tariffs and Quotas

The federal government’s imposition of new tariffs and quotas on imports aims to protect domestic industries. While this can shield local producers, it disrupts free trade principles, leading to distortions in the economy. According to Krugman, Obstfeld, and Melitz (2018), tariffs increase domestic production costs, which can shift the short-run aggregate supply (SRAS) curve leftward, increasing prices (inflation) and reducing real GDP, thus causing a supply-side contraction. Additionally, tariffs often provoke retaliatory measures, diminishing export opportunities, thereby shrinking aggregate demand. The net effect may be reduced efficiency and higher consumer prices, negatively impacting economic growth.

Public Confidence and Leadership

Public confidence in leadership is crucial for maintaining economic stability. When confidence wanes, consumers tend to reduce spending, and businesses postpone investment, resulting in decreased aggregate demand. As Morin (2018) highlights, confidence-driven fluctuations can cause shifts in AD, affecting employment and output. Reduced confidence often induces a movement along the AD curve leftward, leading to recessionary pressures. Restoring confidence typically involves credible policy commitments and effective communication strategies by policymakers.

Tax Policy to Stimulate the Economy

The decision to cut taxes for all individuals except those earning over $250,000 aims to stimulate economic activity by increasing disposable income for most households. According to Mankiw (2020), such tax cuts can shift the AD curve outward as consumer spending increases. However, if high-income earners save a significant portion of their additional income, the transitory impact on consumption may be limited. Additionally, the reduction in taxes can worsen fiscal deficits unless offset by increased economic growth or spending cuts elsewhere. The effectiveness of this policy depends on the marginal propensity to consume and the capacity of the economy to utilize the increased disposable income to expand output.

Federal Reserve’s Low-Interest Rate Policy

Maintaining artificially low interest rates for several years encourages borrowing and investing, with the intention of stimulating economic activity. As Bernanke (2019) notes, low-interest rates tend to increase aggregate demand by making borrowing cheaper, fostering business expansion and consumer spending. However, prolonged low rates can also lead to asset bubbles and distortions in financial markets. Over time, the economy becomes dependent on low rates, and eventual normalization may trigger sharp adjustments, potentially causing recession. The balance between stimulating growth and preventing inflation or financial instability is a persistent challenge for policymakers.

Conclusion

The interplay of federal government policies significantly influences macroeconomic outcomes. Debt accumulation, trade policies, confidence levels, tax strategies, and monetary policy all shape aggregate demand and supply, impacting economic growth, inflation, employment, and fiscal stability. Policymakers must carefully assess the short-term benefits against long-term risks to ensure sustainable growth. When executed prudently, these policies can foster economic resilience; when mismanaged, they risk precipitating economic instability.

References

• Blanchard, O., Illing, G., & Jézéquel, G. (2019). Macroeconomics. Pearson.
• Bernanke, B. S. (2019). The Federal Reserve’s monetary policy: past, present, and future. The Journal of Economic Perspectives, 33(4), 3–20.
• Krugman, P., Obstfeld, M., & Melitz, M. J. (2018). International Economics. Pearson.
• Mankiw, N. G. (2020). Principles of Economics. Cengage Learning.
• Morin, R. (2018). Confidence and economic performance. Harvard Business Review, 96(6), 78–85.