Fiscal Cliff Impact And Decisions

1582 words, 7 pages

Intro Sample...


ECON 1

With the “Fiscal Cliff” coming close, it is important that we take a look at the effects of different kinds of cuts and increases in spending and taxes will have on the economy. The decisions that the Congress makes is very important because we are at a time where increasing GDP is very important to US recovery, as the US is just coming out of recession. Many believe that if no action is taken regarding the fiscal cliff, then the US will spiral back into recession, especially because GDP will drop so much. This is because a $600 billion dollar cut will have an even larger effect because of the multiplier effect. Overall, my opinion is that Congress should do something small, letting most but not all of... View More »

Body Sample...


The US always has some structural deficit; it’s just that now the structural deficit is rather high. Structural defecit is considered a liability because if lenders were to call upon the US to pay their dues, which makes up the structural deficit, then government spending would have to go to paying of debt instead of stimulating the economy, which would decrease GDP, and possibly send the US back into recession. This is a huge reason why policy makers are frantically trying to decrease the structural deficit, because of the liability
In the case of monetary policy, which is conducted by the Federal Reserve and its board of governors, the Fed is indeed facing the zero lower bound, where interest rates are almost at zero, and the Fed cannot really decrease the rates. Of course, the Fed cannot charge a negative interest rate. Generally to stimulate the economy, the Fed will decrease interest rates by buying T-bills to increase the money supply, which will increase investment spending which will increase aggregate demand in the economy, which will increase GDP. This helps to bring a nation out of recession. With tax increases and spending cuts, the US needs to counteract this with expansionary monetary policy, by increasing the money supply through a decrease of interest rates, but because of the zero lower bound, they can no longer do this. So now the Fed is using quantitative easing to buy other types of securities to increase the money supply. The goal is to increase the money supply without changing the interest rates too much. Currently the Fed is buying up mortgaged ...

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