Eco final project about econland PDF

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macroeconomics final presentation about how the world works and how slight decisions can effect the ecnomy greatly...

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ECO 202 Project Template Economic Summary Report

Table of Contents 1. 2. 3. 4. 5. 6. 7.

Introduction Fiscal Policies: Taxation Fiscal Policies: Government Expenditure Monetary Policies Global Context Conclusions References Introduction

For the benefit of the incoming administration, I submit this report to document, analyze, and interpret the macroeconomic policy decisions I made as the chief economic policy advisor of Econland. The purpose of this document is to further our national prosperity by deepening our understanding of the relationship between macroeconomic policies and their consequences for our citizens. The report includes a thorough accounting of the major fiscal and monetary policy decisions made over each of the seven years of my term, as well as an explanation of the underlying rationales for those decisions and the resulting impacts of those policies.

Table 3: Economic Environment, Decisions, and Results

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 2.4 2.4 2.8 2.0 1.6 1.0 1.3

Global Economic Growth Forecast 2.0 Consumer Confidence Index 100.0 100.0 102.3 102.9 100.8 98.7 103.1 Interest Rate % 3.0 2.5 2.5 2.0 2.5 2.5 2.5 Income Tax Rate % 24.0 20.0 20.0 17.0 20.0 18.0 20.0 Corporate Tax Rate % 30.0 24.0 21.0 21.0 23.0 21.0 21.0 Government Expenditure US$ (in billions)30.0 30.0 32.0 28.0 28.0 30.0 33.0 Real GDP Growth % 2.5 5.8 5.5 1.4 6.0 6.2 7.8 Unemployment Rate % 5.0 3.7 2.5 4.2 4.0 2.1 3.5 Inflation Rate % 2.0 2.4 4.5 6.8 3.5 3.9 3.7 Budget Surplus (Deficit) as % of GDP -3.0 -5.3 -4.7 -2.7 2.4 0.7 4.1 Table 1.1

101.0 2.5 22.0 24.0 30.0 1.0 4.1 7.0 6.2

The table above summarizes the macroeconomic climate of Econland over my term. Throughout my seven-year term the population was satisfied with decisions I made for the economy. The population was an average of about 78-point approval rating when my term ended, in which I used the base case scenario. F i s c a l P o l i c y : T a x a

t i o n Table 1: Real GDP and Its Components Year 0 Year 1 Year 2 Consumption 55.0 66.9 76.6 Government Ex 30.0 30.0 32.0 Investment 15.0 16.0 17.9 Exports 25.0 25.7 26.9 Imports 25.0 30.3 34.1 Nominal GDP 100.0 108.3 119.3 Real GDP 100.0 105.8 111.6

Year 3 Year 4 92.1 106.1 28.0 28.0 20.1 21.4 28.2 29.5 39.7 44.4 128.7 140.6 113.1 119.9 Table 2.1

Year 5 118.4 30.0 22.3 31.1 47.4 154.3 127.4

Year 6 127.3 30.0 23.5 32.8 48.9 164.8 128.6

Year 7 141.7 33.0 25.7 34.7 52.3 182.9 138.7

When taxes get too high GDP shrinks, when taxes get too low GDP rises a little or stays the same. I decreased the income and corporate taxes slightly about 10% the whole seven years I was in office. My reason for lowering the tax rates is to improve consumption and investment. The lower the taxes are, the more I figured the people of my country would eat and drink and make investments. When the government lowers income taxes, it increases the amount households take home, and how much they will save a portion of, and use on consumer goods (Mankiw 2021). Lowering corporate taxes results in international investments in the U.S. and thus creates more jobs and makes businesses produce more goods and services (Procon.org,2017). In my term, Consumption rose from 55.0 the first year and more than double by the end of my seven-year term to 141.7. The income tax rate stayed pretty much the same the whole term just fluctuated slightly starting in term 2 and then in term 4 and then back up again but the consumption still always rose, investment rose slowly as well during each term which I think directly relates to the way I tried to decrease the tax rates each term. It went up from year one to year two up 1.9 points, then to year three 2.2 points, then year four 1.3 points, then year five .9 points, to year six 1.2 points to finally in year seven jumping up 2.2 points. That is a total of 9.7 points increased in investments over seven years. “In dollars, the income taxes payable on $4,000 of income increased from $15 to $160 between 1929 and 1932, a 10.667-time increase. In today's dollars that would be like a tax increase of more than $2,315, from $240 in 1929 to $2,555 in 1932, on income in today's dollars of about $64,000 “(Perry, 2008). During the Great Depression, both consumption spending and investment spending experienced negative growth. Households use savings to retain relatively smooth consumption despite fluctuations in their income (economics theory through application, Ch., 22). During the Great Depression we saw that while output and consumption both decreased, consumption decreased much less then output did (economics theory through application, Ch. 7). For example, from 1929 to 1933, real GDP decreased by 26.5 percent, while consumption decreased by 18.2 percent (7).

Fiscal Policy: Government Expenditure

Figure 3.1

Figure 3.2

Government spending rate needs to be adjusted according to what the income tax, corporate tax, and interests’ rates are. During my term, I chose to lower my income tax, corporate tax, and interest rates so I raised my government spending slightly to try to balance the budget. Over the seven years, I only raised government spending slightly between $28 million to $33 million. An increase in government purchases stimulates aggregate demand, however, this increase may also cause a rise in interest rates which reduces investment spending and puts downward pressure on the aggregate demand, which is referred to as the crowding- out effect (Mankiw, 2021). Adding too much additional government spending to balance out the budget could cause this crowding-out effect, so doing it slowly over the seven years, the economy of Econland did not experience this. Government spending is an important part of GDP. During my term, most of the years had high real GDP growth except years 3 and 6 but in year 7 I had great real GDP growth at 7.8%. It did kind of roller coaster in a few years in years 3 and 6 but besides those years I see that it rose slightly in the other years. The natural unemployment rate was 5%, during my term I never rose the unemployment rate above 5% I kept it under from 2.1% to 4.2%. The unemployment rate stayed low because the increase in GDP caused for the aggregate which causes for an increase in the demand for workers. This means that when the aggregate supply in an economy increases, unemployment will decrease (the relationship between inflation and unemployment). Monetary Policies

Figure 4.1

During my seven-year term I decided to lower the interest rates to try to boost the economy. When consumers pay less interest, they tend to have more money at home, and they will spend more money in the economy. Businesses and farmers also benefit from lower interest rates because they can make large equipment purchases due to low cost of borrowing (Seabury, 2020). As with interest rates being so low will stimulate people to borrow money to make bigger purchases like buying houses or cars. This creates a situation where output and productivity increases. Lower interest rates increase consumption and lower savings. I decreased the interest rate from 3.0% down to 2.5% for most of the years except for year 3 when I lowered it down to 2.0% but looking at my imports and exports for all seven years both increased each year. Exports increased slowly every year going from 25.0 to 34.7 by year seven increasing about 1 to 2 points per year. Imports on the other hand increased more every year where it started out at 25.0 and increased to 52.3 by year seven increasing about 5 points every year. Inflation rate went up to 6.8 in year 3 and 7.0 in year 6 but I think that was due to bringing down the interest rate and unemployment rate and increasing the government spending. Overall, throughout my term the economy did pretty good with the nominal GDP and real GDP trending upwards throughout the whole seven years. I was also able to keep the unemployment rate down with it starting at 5.0% and bringing it down to 2.1% in year 5 keeping unemployment below 5% all seven years of my term. The federal reserve influences the money supply and credit in order to accomplish several goals: to promote steady prices and full employment, to promote stability in the financial system, and to facilitate sustainable economic growth (Cambride-credit.org). Other duties include regulation of the banking industry and making sure consumers have access to the information they need in order to participate in the financial system (Cambridge-credit.org). During the great depression, was undoubtedly the most severe economic downturn in the United States and told untold sufferings among the millions (Lopez, 2011). The Federal reserve actions until the run-up of the Great Depression were important in hastening the decline in the economic conditions (2011). While this policy action dampened excessive borrowing to finance stock purchases, it also brought unintended consequences (2011). By 1933, government policy actions helped stabilized the banking system and the economy improved significantly in the mid- 1930s (2011). When I saw the inflation rate rising in my economy is year 3 to a rate of 6.8%, I had to make some adjustments to level it out and bring it back down. I put the interest rate and income tax rates down and get the unemployment rate back down and the government expenditure had to be slightly brought down to recover. I did not adjust the rates every year, so I had a roller coaster of rates every year. This proves that while monetary policy is important for economy growth this simulation does show that it is slow going before it is a positive change.

Global Context In a closed economy, we think that monetary policies work mainly by changing interest rates and credit conditions, which in turn affects the amount of investment spending by businesses and households. In an open economy, we think monetary policies has a second way by which it can affect the level of economic activity. In a closed economy, savings and investments are always the same because there is no import and exports, and the economy will stay the same. We can flourish in what we produce in our country but the things we do not produce here or that we don’t produce enough of to meet the supply and demand will skyrocket. In an open economy, the GDP components are consumption,

investment, government spending, and net exports, which in a closed economy there are no net exports. The monetary policies in these two economies will differ because of trade. In the long run, fiscal policy influences saving, investment, and growth (Mankiw, 2021). In the short run, fiscal policy is more influential o the aggregate demand for goods and services (2021). Monetary policies control the interest rates, so any change in this rate will cause a change in exchange rates as well, in turn leading to change rates in net exports (Saylor Academy). Monetary policies have no effect on a closed economy because there is no international trade so there is nothing to adjust. Conclusions Macroeconomics is very important in seeing the entire picture of national supply and demand, national income, price level, employment, and savings and investments. It takes into consideration how everything works together. Unemployment, tax rates, inflation, GDP, maximum income, international trade and how it effects all aspects of an economy. From how many people have jobs, how many people are on unemployment, how if the government decides to raise taxes, that effects the buying power of consumers, consumption, investments, and savings. Everything is connected and you have to do your best to balance it out. If the economy needs more workers, then unemployment goes down, if you give too much to the government for spending than the taxes raise. I feel throughout my seven-year reign that I made some pretty good decisions for the economy and policies. If you look at the nominal GDP and the real GDP I have it increasing every year. Unemployment stayed below the 5% even though it did have a little roller coaster during the seven years, but it always stayed under the 5%. My goal was trying to keep the tax rates under control and try to make the people of Econland and the government happy. I know that sometimes that’s impossible, but I think I did a pretty good job with keeping my country from going into a recession. The consumer confidence during my term stayed pretty much over 100% except for year five when it went down to 98.7 but it still didn’t stray far from the original 100% it started with. I honestly. Don’t know why it dipped in year five because I feel like I had the tax rates and government spending the same throughout. But we started with 100% consumer confidence index and then it rose to 102.9 and then don to 98.7. Overall, I think I did pretty well keep the economy out of a recession and keeping them pretty consistent, the people of Econland seemed to be pretty happy with my decisions I made, and I am happy I was able to keep my people secure and happy. Being able to look at the whole picture in macroeconomics I think I was able to make better decisions for my country because I could look at the whole picture of what was best for my people and that they will be able to know when to make an investment or to open a savings account, and stimulate economy when it needs. References Cambridge-credit.org. What is the federal reserve? Retrieved from https://www.cambridgecredit.org/federal-reserve.html?gclid=CjwKCAjwtJ2FBhAuEiwAIKu19ppLfFjo40tlebah30K0YerLLq-Pz2mQ3nVtEw6MIMm7aBiJhvT2BoCVmEQAvD_BwE Economics theory through applications. Retrieved from: https://saylordotorg.github.io/text_economicstheory-through-applications/index.html Lopez, David (2011, November). "Then and Now: Fed Policy Actions During the Great Depression and Great Recession," Page One Economics®.

Mankiw, N. G. (2021). Principles of economics (9th ed.). Cengage Learning. Perry, Mark J. (2008, November 10). Lessons from the great depression. https://seekingalpha.com/article/105002-lessons-from-the-great-depression-and-one-of-the-biggest-taxhikes-in-u-s-history Procon.org (2017, July 21). Britannica. retrieved from https://corporatetax.procon.org/#:~:text=Pro %203-,Lowering%20corporate%20income%20taxes%20results%20in%20increased%20international %20investment%20in,corporate%20tax%20rates%20lose%20revenue%E2%80%A6 Saylor Academy. Monetary policy in the open economy. Retrieved from http://saylordotorg.github.io/text_macroeconomics-theory-through-applications/s14-04-monetarypolicy-in-the-open-ec.html Seabury, Chris (2020, December 17). How interest rates affect the U.S. market. Investopedia. https://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp#:~:text=When %20consumers%20pay%20less%20in,the%20low%20cost%20of%20borrowing. The relationship between inflation and unemployment. Lumen. Boundless economics. Retrieved from https://courses.lumenlearning.com/boundless-economics/chapter/the-relationship-between-inflationand-unemployment/#:~:text=As%20aggregate%20demand%20increases%2C%20unemployment,a %20demand%2Dpull%20inflation%20scenario.&text=As%20more%20workers%20are%20hired%2C %20unemployment%20decreases.,leading%20to%20increases%20in%20inflation. [Add other citations as needed in APA format]....