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Fiscal Policy Simulation

The purpose of this simulation is to help familiarize ourselves with some tools the Government uses to help regulate the Fiscal Policy in order to keep the economy moving in the right direction and to maximize the long term potential outputs. This simulation also shows the impact the fiscal policy has on real output and Gross Domestic Product. This paper will answer questions about the effects of changes made to the fiscal policy during the simulation and provide a summary of the results from my decisions.

In this simulation we are given the ability to make changes the Fiscal Policy for the country of Erehwon. We are given the opportunity to make decisions about spending and taxes that ultimately impact the country's state of equilibrium. As we look at the relationship of government spending to taxes and where the money is allocated we are able to identify the impacts of more than just the budget or deficit. With the small changes that are made to the Fiscal Policy we are also able to see the impacts it has on inflation, unemployment and the Gross Domestic Product for the country. Small changes in one area may have major impact on another area. While in contrast major changes to one area have little or no impact to other things. As a politician elected by the people in this simulation it was important to watch the popularity indicator for the decisions that were made. Although a decision may look good on paper the public may or may not receive the changes positively. Take government spending and taxes for example. Although reducing taxes typically gains the favor of the public and raising taxes typically lowers the publics favor, raising taxes isn't always the solution for the government to getting more money and gaining public approval. Reducing expenditures in areas that are more expendable and less visible to the public impact the overall equilibrium in a comparable fashion. Having the ability to visually see the changes with a chart or graph are the only way to gain a true sense of the impact.

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