Supply and Demand Models

Topic: DesignConstruction Engineering
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Last updated: November 22, 2020

One notable example is the most common recommendation for the government to adopt an expansionary fiscal policy, which Involves Increased government spending and tax reduction. Tax reduction is a primary fiscal policy tool for reducing unemployment, increasing disposal income, and ultimately increasing consumption, aggregate demand, and government revenues.

Increased government spending, especially on Infrastructure, construction works, and other Job creation Initiatives can also reduce unemployment.Another important recommendation is the recent recommendation by the Congressional Budget Office (COB) for a budget deficit reduction (Elmsford, n. D. ). Essentially underpinning this recommendation are three major concerns, The first concern is about the magnitude of the proposed deficit reduction. The second concern relates to the timing of the proposed deficit reduction.

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The final concern relates to the composition of the proposed deficit reduction.Effectiveness of the Fiscal Policy Recommendations The extent to which each of the two fiscal policy recommendations affects the national economy would depend largely on the applicable model or economic theory. Thus, to understand how budget deficit reduction or Increased government spending and tax reduction would impact of unemployment, interest rates, expectations, and consumer income, it is important to give a brief overview of the Keynesian model and the Classical model and then gauge the effectiveness of each fiscal policy recommendation within the context of the different models.The Classical Perspective The Classical economic theory, on the one hand, promotes the Idea or concept of little or no government intervention, believing that too much government spending stunts the country economic growth. Instead, the Classical economic theory believes that consumer spending and business investment represent a more important component of the country economic growth. In short, Classical economists favor the contractions fiscal policy and focus most Importantly on long-term economic solutions.From this perspective, fiscal policy focused on budget deficit reduction will 1 OFF debt on the economy, relieve some of the long-term pressures on the budget, diminish the risk of a fiscal crisis, and enhance the government’s flexibility to respond to unanticipated developments” (Elmsford, n.

. , The Magnitude of Deficit Reduction). By contrast, the fiscal policy recommendation focused on increased government spending, and tax reduction would be inappropriate and ineffective from the Classical perspective.The reason is that the very concept of increased government spending and tax reduction is the antithesis of the contractions fiscal policy – the bedrock of the Classical economic theory. The Keynesian Perspective The Keynesian economic theory, on the other hand, promotes the idea or concept of increased government spending and reduced taxation to stimulate the economy specially during financial crisis or recession when individual consumers and businesses lack the resource capacity to sustain the economy.

Keynesian economists favor the expansionary fiscal policy and focus most importantly on immediate or short-term economic solutions. From this Keynesian perspective, therefore, increased government spending and tax reduction would be most appropriate and effective as they as a primary fiscal policy tool for reducing unemployment and increasing government revenues, especially during periods of economic downturns or recessions. However, the fiscal policy recommendation for budget deficit reduction would be inappropriate and ineffective from the Keynesian perspective.

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