Measuring Economic Health Memo Regina Jernigan ECO/212 Principles of Economics September 9, 2010 Terron Khemraj Measuring Economics Economics activity is measured by real Gross Domestic Product (GDP). Real Gross Domestic Product is the output of goods and services by labor and property within the United States (Bureau of Economic Analysis, 2010). Real GDP on average grows about 3. 5% each year and has an impact on the business cycle. The fiscal policy has a tremendous effect on individuals and businesses. The tax and interest rate plays a major role on the success or failure of the economy.
The business cycle is measured by changes in real gross domestic product, and therefore, the focus is on changes in output and not input. Changes the government impose on purchases and taxes is aggregate demand can alter the level of real GDP. When government purchases decrease raises taxes, aggregate demand becomes slow and the rate of inflation decreases. Real GDP rises and fall over time, this cycle is known as the business cycle. Changes in federal taxes and purchases made by the government to achieve macroeconomic policy objectives are called fiscal policy (Hubbard and O’Brien, 2010).
The several government bodies that determine national fiscal policy is as follows: * Office of the President of the United States – makes decision on changes to the fiscal policy * Department of Treasury – manages and constructs the fiscal policy * Office of Management and Budget – develops and analyzes the fiscal policy * Government Accountability Office – audits the fiscal policy Each member of government plays a critical role in determining the patter and level of economic activity. Congress and the presidents have used fiscal policy to fight recession.
If a new fiscal policy takes longer than expected to be approved, this could cause harm. The Federal Open Market Committee can change the monetary policy at any of the eight meetings held each year, but the president and the majority of Congress has to agree to change the fiscal policy. This could cause a recession if the process takes too long for approval. When the fiscal policy increase aggregate supply, change taxes, and increase incentives to work and start a business (Hubbard and O’Brien, 2010).
A decrease in taxes gives new businesses an opportunity to form, whereas, an increase in taxes makes it harder for business owners to afford to purchase or buy into a business. The pattern of government expenditure affects the potential for future economic growth because the role in public investment. The government decision to expand infrastructure by building bridges or repairing roadway, creates jobs that affects employment by decreasing the unemployment rate. The increase in jobs will cause a domino effect; employees will spend more causing production to increase to supply the demand of consumers.
The fiscal policy can determine the level of activity and employment based on their interest rate. When taxes increase it allows consumers to be conscious spenders because they will not spend more with higher taxes. Whereas, when taxes are cut consumers increase their spending to consume more of their needs and wants. If no new jobs, production begins to layoff causing the unemployment rate to increase and consumer spend less. When interest rates increases, credit becomes limited, and production decreases. On the other hand, when interest rates decreases, more money is available and banks loan more and production begins to increase.
Businesses availability to expand is favorable when the interest rate decreases. A decrease in interest rate leads to an increase in hiring causing production to increase. The fiscal policy has a negative effect if the tax and interest rate increase causing consumers to spend less and businesses are not able to expand. When tax and interest rate decrease, it has a positive effect allowing more spending of consumers and businesses to expand. References Hubbard, R. G. , & O’Brien, A. P. (2010). Economics (3rd ed. ). : Prentice Hall http://www. istockanalyst. com/