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Fiscal Policy Simulation

Essay by   •  March 8, 2012  •  Research Paper  •  737 Words (3 Pages)  •  1,452 Views

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Fiscal Policy Simulation

The country of Erehwon has a lot to offer the world's economy. The country is rich in mineral deposits and is a great location for agriculture. Their main exports are fresh fruits, vegetables, processed foods, iron ore, manganese and bauxite. Tourism is important and it contributes to foreign exchange. However, Erehwon lacks infrastructure and a well developed banking system. The main issues facing the government are to grow the economy, restraining government spending, growing infrastructure and encouraging private enterprise. Past problems have plagued the government. Those being high budget deficits, weak infrastructure and low on the priority list for foreign investors. Erehwon has a population of 30 million, per captia income of US $1,300, 20% of the population are below the poverty level and the literacy rate is 56% for males and 35% for females.

The goal of the simulation is grow the economy of Erehwon and increase the popularity of the President over next four years. That will be accomplished by increasing/decreasing spending on infrastructure, spending on education for low-income students and raising/lowering income taxes. These changes in the fiscal policy will impact the real income and real GDP economy of the future. In the first year, real GDP decreased and the President's popularity grew. Unfortunately, the last years the real GDP increased and the President's popularity fell.

To illustrate the effects of changes in fiscal policy, .8 mpc indicator is used. If .8 of $100 is spent then that will be $80. If .8 of $80 is spent then that will be $64. This will continue until each is added together and reach $500. That is above the equilibrium of supply and demand.

Four key points were used in the simulation; aggregate demand, gross domestic product, unemployment rate and fiscal policy. The definitions were stated in the simulation. Aggregate demand is "the sum of all planned expenditures in an economy at different levels of prices. It is the sum of consumption expenditure, investment expenditure, government spending and net exports." (University of Phoenix) Gross domestic product is "the total market value of all final goods and services produced in an economy in one year. Real GDP is the value of GDP adjusted for inflation."(University of Phoenix) Unemployment rate is "the percentage of people in the economy who are able and willing to work but who can not find work."(University of Phoenix) Finally, fiscal policy is "changes in government spending or taxation to stimulate or slow down the economy."(University of Phoenix)

Growing Further results are as follows. Year 2xx6: Government spending on infrastructure 2.29 million, government spending on education programs 1.53 million, changes in income tax rates 1.00%, real GDP 41.72 billion inflation 6.31%, unemployment rate

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