Report on Fiscal Policy, Unemployment, and Public Debt Analysis

This report provides a detailed analysis of fiscal policy, its tools, and its impact on the economy, specifically focusing on unemployment and public debt. The report begins by explaining the impact of inflationary and recessionary gaps and lump-sum taxes on the domestic economy, using the Keynesian cross graph to illustrate equilibrium and potential GDP. It also addresses the difference between actual and cyclical budget deficits. The report then discusses and evaluates criticisms of fiscal policy, examining timing problems and false concerns about public debt. Furthermore, it explores the tools of fiscal policy that can be used to expand the economy and alleviate unemployment, including education, reduced trade union power, employment subsidies, and stricter benefits requirements. The report also provides data on the size of the US public debt compared to other nations, along with a graphical representation of inflationary and recessionary gaps. Finally, it differentiates between discretionary and non-discretionary fiscal policy, lists timing problems, and examines the composition of US public debt related to domestic and foreign holdings.

Questions
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Contents
Contents...........................................................................................................................................2
1. Impact of inflationary and recessionary gaps and lump-sum tax on domestic economy:..3
2..............................................................................................................................................3
3. Difference between actual and cyclical budget deficits:....................................................4
4. Discussion and evaluation of criticisms of fiscal policy....................................................4
1. Applying fiscal policy, what tools would be used to expand economy and alleviate problem
of unemployment:...................................................................................................................4
2. Size of public debt in US how does this compare with other nations as a percentage of GDP
................................................................................................................................................5
2. Graph difference between inflationary and recessionary gaps:..........................................5
3. Difference between discretionary versus nondiscretionary fiscal policy:..........................5
4. List of timing problems of fiscal policy:............................................................................6
5. List and explain false concerns about public debt:.............................................................6
6..............................................................................................................................................6
7. Composition of US public debt related to domestic and foreign holdings:.......................7
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TASK 1
1. Impact of inflationary and recessionary gaps and lump-sum tax on domestic economy:
In Keynesian cross graph, if the net spending line crosses 45-degree line at level of future
GDP, economy is in good condition. There's no recession, as well as unemployment is at natural
rate i.e. call full employment. However, there is no assurance that equilibrium will be struck
at potential gross Domestic product output level. Equilibrium may be greater or lesser. Inflation
gap can be viewed not as literal estimate of how high actual GDP is going to be, although
as statement about how much additional gross spending in economy increases what is expected
to achieve possible Gross domestic product. Inflationary gap means that, since economy cannot
produce sufficient products and services could sustain this amount of gross consumption,
spending would instead trigger inflationary price rises. Thus, even though shifts in price level
don't occur directly in Keynesian cross-equation, notion of inflation becomes implicit
in definition of an inflationary gap (Teece, 2019).
2.
a, b. At the $380 billion level of GDP, saving = $24 billion and planned investment = $16 billion
(from the question). This deficiency of $8 billion of planned investment causes an unplanned $8
billion increase in inventories. Actual investment is $24 billion (= $16 billion of planned
investment plus $8 billion of unplanned inventory investment), matching the $24 billion of actual
saving.
c, d. At the $300 billion level of GDP, saving = $8 billion and planned investment = $16 billion
(from the question). This excess of $8 billion of planned investment causes an unplanned $8
billion decline in inventories. Actual investment is $8 billion (= $16 billion of planned
investment minus $8 billion of unplanned inventory disinvestment), matching the actual of $8
billion. When saving is greater than planned investment, unplanned investments in inventories
occur and inventories rise, as at the $380 billion level of GDP. As inventories rise, businesses
revise their production plans downward and GDP falls. (Inventories will fall as the economy
moves toward equilibrium.) When planned investment exceeds saving, unplanned disinvestments
in inventories occur and inventories fall, as at the $300 billion level of GDP. As inventories fall,
businesses revise their production plans upward and GDP rises. Equilibrium GDP—in this case,
$340 billion—occurs where planned investment equals saving.
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3. Difference between actual and cyclical budget deficits:
Actual Budget deficit happens when expenditure exceeds revenues and indicates the fiscal health
of country. Broadly speaking, government uses term budget deficit so if referring to expenditure
rather than to enterprises or individuals. While cyclical budget deficit helps to determine
variations in tax income and expenditure owing to the business cycle. For instance, in recession,
tax collections are declining as well as cost of un-employment benefits is rising (Bookstaber,
2019).
4. Discussion and evaluation of criticisms of fiscal policy
Government in country may have inadequate information about condition of economy and fail to
get the right information as to what economy needs.
Time lags: it would take term to raise government expenditures. It might take a few months
for government to decide to flow through to economy and actually influence AD. It could be late
by then.
Crowding out: Few analysts claim which expansionary financial policy (increased
governmental spending) would not boost AD since higher governmental spending would
stifle private sector. That's because government has to borrow from private sector, which would
then have smaller private spending assets.
Government spending are inefficiently managed: Free market analysts contend that increased
government spending continues to be spent on unsustainable spending programs. Often, it could
be impossible to minimize investment in the future because lobby interests have exercised
political leverage to retain stimulus funding as permanent.
Increased interest rates. In such circumstances, expansionary monetary policy will result to
higher bond rates, raising the costs of debt repayment.
TASK 2
1. Applying fiscal policy, what tools would be used to expand economy and alleviate problem of
unemployment:
 Education and education: The goal is to offer longer-term unemployed skills that allow
them to obtain employment in emerging sectors e.g. retraining unemployed steel staff to
have essential IT expertise. Skills that enable them find jobs in service sector.
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 Reduce influence/power of trade unions. When workers will negotiate wages above price
average, they can create actual wage unemployment. Under this situation, a decrease in
the power of trade associations (or a reduction in min wages would help to address this
actual unemployment rate.
 Subsidies for employment. Businesses could be offered tax cuts or incentives for longer-
term unemployed employees. This aims to give them fresh faith and career preparation. It
would be very costly, though, which could enable businesses to simply substitute existing
employees with longer-term unemployment in order to benefit through tax cuts (Akbar
and Tracogna, 2018).
 Stricter benefits requirements. Governments should play more pro-active part in helping
unemployed people accept work or face losing welfare. For a certain amount of
time, government must guarantee employment in public sector.
2. Size of public debt in US how does this compare with other nations as a percentage of GDP
Currently, the US's debt-to-GDP percentage is 106.5 percent, almost double of the
Switzerland and almost 5 times of Australia. Also, although Luxembourg and Qatar have largest
GDP per-capital at more than $104,000, they have debt-to-GDP ratio of below one-
third of United States at around 27.8% and 25.8%, respectively.
2. Graph difference between inflationary and recessionary gaps:
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3. Difference between discretionary versus nondiscretionary fiscal policy:
Discretionary fiscal policy implies government or legislative action that suggests planned
policy to stabilize economy, while non-discretionary financial policies take place immediately.
Both forms of monetary policy vary from one another. Non-discretionary monetary policy
requires regulation that automatically accelerates or slows down whole economic growth.
While, discretionary monetary reform requires additional policies intended to stabilize the
economy.
4. List of timing problems of fiscal policy:
 When the government requires monetary strategy, its success would also depend upon
another elements of AD.
 A rise in the government spending, which has several detrimental consequences, would
be triggered by quantitative easing (cutting taxes and raising G).
 This will take quite a longer time to move through the system if the state determines to
boost expenditure, and it will be very late
5. List and explain false concerns about public debt:
 Unless It Distributed in Such a Country Same Money, DEBT IS Innocuous.
 Low inflation imply that debt isn't relevant.
 They must reduce the deficit and repay the debt.
 International relief, pension plans as well as other services that have been usually
criticized by lawmakers are small, but it does not create a change to remove anything.
6.
(a)
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(b) Tax revenue = $10, Disposable Income = $90, Consumption = $112, Tax rate = 10%, same
7. Composition of US public debt related to domestic and foreign holdings:
The U.S. government deficit, as of Jan. 22, 2021, is $27.8 trillion and growing. Some
concern that unsustainable areas of government borrowing may have an influence on financial
stability, including exchange, productivity expansion and employment having consequences also
for national currency strength. Since around October 2018, U.S. debt sold to foreign was $6.2
trillion, or about 39 percent of the budget deficit of $16.1 trillion as well as 28 percent of the
overall borrowing of $21.8 trillion (Camilleri, 2018).
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REFERENCE
Books and Journals:
Teece, D.J., 2019. A capability theory of the firm: an economics and (strategic) management
perspective. New Zealand Economic Papers, 53(1), pp.1-43.
Bookstaber, R., 2019. The end of theory: Financial crises, the failure of economics, and the
sweep of human interaction. Princeton University Press.
Akbar, Y.H. and Tracogna, A., 2018. The sharing economy and the future of the hotel industry:
Transaction cost theory and platform economics. International Journal of Hospitality
Management, 71, pp.91-101.
Camilleri, M.A., 2018. Travel marketing, tourism economics and the airline product: An
introduction to theory and practice. Springer International Publishing.
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