BUS305: Competitive Analysis And Business Cycles
TUI
Module 4 Case Assignment
BUS305 Competitive Analysis and Business Cycles
Prof. Yeo
March 31, 2014
Abstract: Please address the following questions in a 4-5 page essay using the resources from the background materials page as well as research on your own.
1. Suppose that the real GDP is below potential GDP. Answer the two questions below.
a. What fiscal policy tools could be used to stimulate the economy? One fiscal policy tool that could be used to stimulate the economy is government taxation. By determining how much money the government and individuals have to spend, taxes raised or lowered, will influence the economy greatly. The government can cut taxes, which in turn will save consumers more money, with the hopes that those consumers will then take that extra money saved in taxes, and spend it on goods and services that will help increase the economy. …show more content…
Another tool that the government can be used to stimulate the economy is spending. Government money can be given to certain individuals or specific sectors of the economy, with the hopes again, that the money will then be spent by those individuals on goods and services that will help boost the economy. By manipulating the levels and allocations of taxes and government expenditures, the attempt is made to stabilize the economy.
b. What monetary policy tools can the Federal Reserve use to stimulate the economy and increase economic growth? Please identify at least two specific tools. One tool the Federal Reserve uses to stimulate the economy is by controlling the discount rate. This is the rate that is charged to banks when they seek money from the Fed, to increase their reserves. When the Fed determines and makes changed to the discount rate, it directly affects the economy and what consumers pay for loans and receive back on their savings from the bank. The idea behind controlling this discount rate is that if it is kept low, banks will hold fewer excess reserves, and this would ultimately increase the demand for money in the economy. Another tool of monetary policy that can stimulate the economy is open market operation. This is done by having a central bank buy or sell government bonds on the open market in order to regulate the money supply and expand or contract the amount of money in the banking system. “Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite” (investopedia.com). The Federal Reserve’s goal of this plan is to adjust the rate at which banks borrow reserves from each other, which is known as adjusting the federal funds rate.
2. What should the Fed do if it wanted to reduce inflation in terms of the money supply?
In order to reduce inflation, the Fed can choose two paths.
If it wants to slow down economic activity, the Fed will raise interest rates. This means people will have to pay more to borrow money, which will lead to less borrowing and spending. The flip side of this is that the Fed can also lower interest rates to stimulate the economy. The lower the interest rate, the more money people will borrow and the more money people will spend. “Economists generally agree that the single most important thing the Fed can do for the economy is to maintain slow and steady inflation” (nytimes.com). Another way that the Fed is trying to control and reduce inflation is by giving credit to the banks for money spent on bond purchases. The Fed holds the money in accounts that is spent on bond purchases and they “recently started to pay interest on those accounts, giving banks an incentive to leave the money with the Fed. As the economy starts to grow, Fed officials say they can keep a lid on inflation by paying the banks higher interest rates to leave the money untouched”
(nytimes.com).
3. Both monetary policy and fiscal policy encounter the problems of lags. Discuss the kinds of lags they encounter and the degree of difficulties they present to policymakers. One type of lag that policymakers encounter is a recognition lag. This is a lag that occurs while taking the time to determine whether or not a problem needs governmental action. “The recognition lag arises because it takes time to collect and analyze economic data; to verify that an actual problem exists. This lag is seldom less than a month and typically lasts a couple of months” (amosweb.com). Another type of lag that policymakers encounter with monetary and fiscal policy is a decision lag. These types of lags occur when policymakers have to take the time to make a decision on a suggested action. Another type of lag that policymakers encounter is an implementation lag. This type of lag is described as “the time it takes for the government sector to take the steps needed to activate or implement the chosen policy” (amosweb.com). An impact lag is another type of lag that policymakers encounter. Once the decision is made on an action, and that action is implemented, an impact lag can occur while the action makes its way through the economy. Time is needed for the action to show the full effect and desired changes in production and income and this causes an impact lag. Regardless of what type of lag policymakers encounter, all policy lags can reduce the effectiveness of business-cycle stabilization policies and can even destabilize the economy.
4. Discuss and explain the concepts of the federal deficit and the national debt. How statistically significant are they for the United States as compared to other countries? Explain how the deficits and the debt arise. The federal deficit is described as “the amount that the government spends each year in excess of what its tax, tariff, and fee revenues bring in” (unomaha.edu). The deficit is created and increased because the government has to borrow to make up the difference in their revenues brought in. The accumulation, year after year, is what makes up the national debt. The national debt is described as the amount of funds that the government has borrowed, but not paid back, over the past years. The government creates spending programs with financial commitments, but they do not always raise enough revenue to cover those commitments. In cases like this, they end up having to borrow the money to cover the commitment which increases the national debt. Additionally, the government will increase its spending on programs such as Social Security, and National Defense, faster than it has created revenues, so the effect of this results in increased debt. “Economists often compare the debt with the total market value of the goods and services the nation produces each year, the GDP” (unomaha.edu). When looking at numbers relating to the federal deficit and national debt for the United States compared to other countries, it is pretty clear to see that the US is high above in our spending and debt practices. “Federal revenue for the 2012 fiscal year was projected to be $2.6 trillion. This is more than the GDP (based on 2011 estimates) of the sixth largest economy in the world, Russia. Federal spending for 2012 was projected to be about $3.7 trillion, more than the GDP of the fifth largest economy, Germany” (forbes.com). The deficit for the fiscal 2012 year was projected to be larger than the entire economy of Indonesia, and that combined with the deficits for the three to five years prior to that, was projected to be greater than the GDP of Japan or India. The United States federal debt is equal in size to the largest economy in the world.
References
Open Market Operations – OMO. (2014). Retrieved from: http://www.investopedia.com/terms/o/openmarketoperations.asp
Applebaum, Binyamin. (October 8, 2013). What the Fed Does, and Can Do. Retrieved from: http://economix.blogs.nytimes.com/2013/10/08/what-the-fed-does-and-can-do/?_php=true&_type=blogs&_r=0
Policy Lags. (2014). Retrieved from: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=decision+lag
Rosen, David. (1994) Debt and Deficits. Retrieved from: http://ecedweb.unomaha.edu/ve/library/debt.pdf
Comparing U.S. Revenue and Debt with Other Economies. (2011). Retrieved from: http://www.forbes.com/sites/matthewcampione/2011/12/09/comparing-u-s-revenue-and-debt-with-other-economies/
Module 4 Case Assignment
BUS305 Competitive Analysis and Business Cycles
Prof. Yeo
March 31, 2014
Abstract: Please address the following questions in a 4-5 page essay using the resources from the background materials page as well as research on your own.
1. Suppose that the real GDP is below potential GDP. Answer the two questions below.
a. What fiscal policy tools could be used to stimulate the economy? One fiscal policy tool that could be used to stimulate the economy is government taxation. By determining how much money the government and individuals have to spend, taxes raised or lowered, will influence the economy greatly. The government can cut taxes, which in turn will save consumers more money, with the hopes that those consumers will then take that extra money saved in taxes, and spend it on goods and services that will help increase the economy. …show more content…
Another tool that the government can be used to stimulate the economy is spending. Government money can be given to certain individuals or specific sectors of the economy, with the hopes again, that the money will then be spent by those individuals on goods and services that will help boost the economy. By manipulating the levels and allocations of taxes and government expenditures, the attempt is made to stabilize the economy.
b. What monetary policy tools can the Federal Reserve use to stimulate the economy and increase economic growth? Please identify at least two specific tools. One tool the Federal Reserve uses to stimulate the economy is by controlling the discount rate. This is the rate that is charged to banks when they seek money from the Fed, to increase their reserves. When the Fed determines and makes changed to the discount rate, it directly affects the economy and what consumers pay for loans and receive back on their savings from the bank. The idea behind controlling this discount rate is that if it is kept low, banks will hold fewer excess reserves, and this would ultimately increase the demand for money in the economy. Another tool of monetary policy that can stimulate the economy is open market operation. This is done by having a central bank buy or sell government bonds on the open market in order to regulate the money supply and expand or contract the amount of money in the banking system. “Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite” (investopedia.com). The Federal Reserve’s goal of this plan is to adjust the rate at which banks borrow reserves from each other, which is known as adjusting the federal funds rate.
2. What should the Fed do if it wanted to reduce inflation in terms of the money supply?
In order to reduce inflation, the Fed can choose two paths.
If it wants to slow down economic activity, the Fed will raise interest rates. This means people will have to pay more to borrow money, which will lead to less borrowing and spending. The flip side of this is that the Fed can also lower interest rates to stimulate the economy. The lower the interest rate, the more money people will borrow and the more money people will spend. “Economists generally agree that the single most important thing the Fed can do for the economy is to maintain slow and steady inflation” (nytimes.com). Another way that the Fed is trying to control and reduce inflation is by giving credit to the banks for money spent on bond purchases. The Fed holds the money in accounts that is spent on bond purchases and they “recently started to pay interest on those accounts, giving banks an incentive to leave the money with the Fed. As the economy starts to grow, Fed officials say they can keep a lid on inflation by paying the banks higher interest rates to leave the money untouched”
(nytimes.com).
3. Both monetary policy and fiscal policy encounter the problems of lags. Discuss the kinds of lags they encounter and the degree of difficulties they present to policymakers. One type of lag that policymakers encounter is a recognition lag. This is a lag that occurs while taking the time to determine whether or not a problem needs governmental action. “The recognition lag arises because it takes time to collect and analyze economic data; to verify that an actual problem exists. This lag is seldom less than a month and typically lasts a couple of months” (amosweb.com). Another type of lag that policymakers encounter with monetary and fiscal policy is a decision lag. These types of lags occur when policymakers have to take the time to make a decision on a suggested action. Another type of lag that policymakers encounter is an implementation lag. This type of lag is described as “the time it takes for the government sector to take the steps needed to activate or implement the chosen policy” (amosweb.com). An impact lag is another type of lag that policymakers encounter. Once the decision is made on an action, and that action is implemented, an impact lag can occur while the action makes its way through the economy. Time is needed for the action to show the full effect and desired changes in production and income and this causes an impact lag. Regardless of what type of lag policymakers encounter, all policy lags can reduce the effectiveness of business-cycle stabilization policies and can even destabilize the economy.
4. Discuss and explain the concepts of the federal deficit and the national debt. How statistically significant are they for the United States as compared to other countries? Explain how the deficits and the debt arise. The federal deficit is described as “the amount that the government spends each year in excess of what its tax, tariff, and fee revenues bring in” (unomaha.edu). The deficit is created and increased because the government has to borrow to make up the difference in their revenues brought in. The accumulation, year after year, is what makes up the national debt. The national debt is described as the amount of funds that the government has borrowed, but not paid back, over the past years. The government creates spending programs with financial commitments, but they do not always raise enough revenue to cover those commitments. In cases like this, they end up having to borrow the money to cover the commitment which increases the national debt. Additionally, the government will increase its spending on programs such as Social Security, and National Defense, faster than it has created revenues, so the effect of this results in increased debt. “Economists often compare the debt with the total market value of the goods and services the nation produces each year, the GDP” (unomaha.edu). When looking at numbers relating to the federal deficit and national debt for the United States compared to other countries, it is pretty clear to see that the US is high above in our spending and debt practices. “Federal revenue for the 2012 fiscal year was projected to be $2.6 trillion. This is more than the GDP (based on 2011 estimates) of the sixth largest economy in the world, Russia. Federal spending for 2012 was projected to be about $3.7 trillion, more than the GDP of the fifth largest economy, Germany” (forbes.com). The deficit for the fiscal 2012 year was projected to be larger than the entire economy of Indonesia, and that combined with the deficits for the three to five years prior to that, was projected to be greater than the GDP of Japan or India. The United States federal debt is equal in size to the largest economy in the world.
References
Open Market Operations – OMO. (2014). Retrieved from: http://www.investopedia.com/terms/o/openmarketoperations.asp
Applebaum, Binyamin. (October 8, 2013). What the Fed Does, and Can Do. Retrieved from: http://economix.blogs.nytimes.com/2013/10/08/what-the-fed-does-and-can-do/?_php=true&_type=blogs&_r=0
Policy Lags. (2014). Retrieved from: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=decision+lag
Rosen, David. (1994) Debt and Deficits. Retrieved from: http://ecedweb.unomaha.edu/ve/library/debt.pdf
Comparing U.S. Revenue and Debt with Other Economies. (2011). Retrieved from: http://www.forbes.com/sites/matthewcampione/2011/12/09/comparing-u-s-revenue-and-debt-with-other-economies/