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Actions Of The Government And The Increase In Prices - Term Papers

Actions Of The Government And The Increase In Prices

The United States economy is currently producing at a level of full
employment in long-run equilibrium. The government then decides to increase
taxes and to reduce government spending in an effort to balance the budget. The
results of the actions taken by the government is the decrease of real GDP.
When taxes are increased that the amount of disposable income that is available
to consumers is lowered. This lowered level of disposable income leads to a
decrease in consumption spending as well as a decrease in savings. This
decrease in consumer and government spending causes the total spending to
decrease by a multiplied amount, As a result of the decrease in total spending
the ...

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of production. This results in the decrease of
the aggregate quantity supplied to decrease. This continues until aggregate
quantity demanded equal the aggregate quantity supplied and a period of short-
run equilibrium is established. The real GDP and the price level have both
decreased from the original long-run equilibrium level and the economy is
operating under the full employment level. At this point the U.S. economy is at
a recessionary gap and a monetary policy must be used to pull the economy from
the current recession.
There are three options that the Federal Reserve has to try and end the
current recession. The federal funds rate could be lowered, the discount to
banks could be lowered, or open market operations could be used. The most
effective of these three options is the use of expansionary monetary policy
through open market operations. The first step in this option is for the
Federal Reserve to start to purchase bonds from consumers. As the Federal
Reserve ...

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Actions Of The Government And The Increase In Prices. (2005, September 20). Retrieved April 20, 2024, from http://www.essayworld.com/essays/Actions-Of-The-Government-Increase-Prices/33597

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PAPER DETAILS

Added: 9/20/2005 12:05:02 PM
Category: Economics
Type: Premium Paper
Words: 823
Pages: 3

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