Answer to Question #113892 in Macroeconomics for Berenateta

Question

With reference to a country of your choice, discuss one macroeconomic policy (either fiscal or monetary) that the government of this country has used within the last 3 years. Explain the Policy measure in detail and state the macroeconomic objectives of the policy measure. Please provide source of your information as evidence that you are the using a real policy and that it has been researched.

Analyse the effect of the policy using the AD/AS model. Discuss thoroughly the effect/result that is being desired through this policy and how will this benefit the economy.

Critically evaluate the policy measure and provide 2 strengths and 2 weaknesses of it. Explain why you think the policy might or might not work.

Answer 1

After the recession, the United States adopted fiscal policy through structural reforms to reduce taxes. The United States president, Donald Trump from congressional Republicans implemented an act to reduce tax as a resolution on the budget for the fiscal year 2018 that was to be exercised through into 2020 (Fandl, 2018). Tax and Job Act were majorly put into place by the economist in Trump’s leadership. The significant tax cut was objectively brought into practice to improve the Gross Domestic Product that decreased from the impacts of the recession. Changes in tax codes and formulation of an overall common corporate tax of 21% was a relief to many companies to lower their production costs( Ramey, 2019). Reduced tax rates had an impact of increasing income for development and expansion in an economy to increase the GDP.

Reduced taxes shift the Aggregate demand curve to the right with a resulting increased output GDP in the AD/AS model. An expansionary fiscal policy such as tax cuts and increased government expenditure can be used together or singly. Republic congress opted for tax reduction to fight reduction and the implication as illustrated by the AD/AS model lead to economic growth with a new equilibrium at E_1. Increased income and investment developments increased the supply of products into an economy while at the same increasing the financial strength of people to increase the demand in the AD positive direction(Barik, (2020). Tax reduction benefits the economy in several ways such as stimulation of investments with adequate resources to with readily available demand for the product produced. Benefits such as employment creation results from surplus revenues generated by companies due to reduced cost of production to expand or develop new companies.

Strengths.

·        Economic growth of the US was boosted by the tax reduction as people could have more incentive to for investment

·        Increased investments provide opportunities for employment to greatly reduce unemployment rates.

Weaknesses.

·        Fiscal policy, tax reduction was not well welcomed with the democrats as it was with the Republicans for there was a conflict of interest. Such conflicts usually affect the full and best implementation of such policies resulting in undesired results.

·        Inflexibility of fiscal policy subjects them to the lengthy legislative procedure that makes them inappropriate to execute economic breakthroughs that are urgent.

The tax cut is practical as it touches a greater percentage of the United States economy to realize the true exclusive picture of every sector.

References

Ramey, V. (2019). Fiscal Policy: Tax and Spending Multipliers in the United States. Evolution or Revolution?: Rethinking Macroeconomic Policy after the Great Recession, 121.

Barik, K. (2020). Unit-11 Fiscal policy in Keynesian model. Indira Gandhi National Open University, New Delhi.

Fandl, K. J. (2018). Law and Public Policy. Routledge