Fiscal Policy

Fiscal Policy Simulation

During the course of the simulation different aspects of Fiscal Policy were examined and altered to bring about equilibrium in the budget for the country. In an ideal situation one can alter one indicator to bring about the desired change in another and balance the budget or keep the budget deficit to a preset level. However, life is not usually ideal and the ideal percentage to increase or decrease spending in certain areas is not known. So, by examining historical data and calculating the present situation by the “best-known multiplier” the government tries to keep recession or inflation at bay.

During the first year of office the government increased the amount of money being spent on the infrastructure of the country. Because there was a lack of transportation development, waterfront/port development and other important trade related development, the interest of other countries to invest in this country was not present. By developing infrastructure a country will invite import and export options with other countries which will entice those countries to invest in the economy.

The second area of increased expenditure was education. By increasing literacy and higher education the people of Erehwon are able to meet the demand which modern business asks of employees. By investing in the people the government is investing in the economic health of Erehwon.

The effects of changes made was to stimulate the economy and invest in the people, thereby increasing the viability of Erehwon by bringing business and investing to the country from other countries. In today’s global economy, being able to trade with other economically healthy countries is key to survival.

Key Points from Reading

1. Using interest rates to assist in balancing the economy is one way to help control inflation or recession. As stated in Economics by Colander, 2004, “Interest rates are the mechanism that equilibrates supply and demand in the financial sector.” When interest rates are high, individuals invest their money in financial institutions to earn interest. When interest rates are low, individuals “incur financial liabilities”, (Colander, 2004) by investing in big-ticket items such as real estate or appliances, and cars. During the latter, the investment again earns the individual a gain on the money invested in a couple different ways. Real estate, as history shows, usually appreciates in value, or if the property was purchased as rental property, the owner will gain in 2 ways; appreciating and rental receipts.

2. Another example using interest is bond prices. When interest rates go up,

the price of the bond goes down. Inversely, when interest rates go down, the

price of the bond goes up. The concept is to buy the bond and wait for the

interest rate to fall. The bond will be more valuable because it pays out at the

higher interest rate existing when purchased.

3. Money as a Medium of Exchange was an interesting review. In order to purchase products or services in today’s economy, one must have money. If no money exists then the products and services must be attained another way. One of those alternative ways to purchase goods or services is called bartering. The exchange of a good or service one person has for the good or service another person owns. The advent of money meant that bartering could be put aside if a person had some money to purchase the product or service needed. If an economy should fail and money doesn’t exist any longer a return to bartering would need to occur. So,