Actions Of The Government And The Increase In Prices :: essays research papers

Actions of the Government and The Increase in PricesThe United States deliverance is shortly producing at a direct of fullemployment in semipermanent equilibrium. The government then decides to increasetaxes and to reduce government spending in an effort to balance the budget. Theresults of the actions taken by the government is the reduction of palpable GDP.When taxes be increased that the amount of disposable income that is availableto consumers is lowered. This lowered level of disposable income leads to adecrease in consumption spending as well as a decrease in savings. Thisdecrease in consumer and government spending causes the come in spending todecrease by a multiplied amount, As a result of the decrease in total spendingthe aggregate demand decreases and the aggregate demand curve shifts to the left.This decrease in consumer and government spending also causes businesses to invitea exorbitance of inventories. At this point the output is greater than spending andas a result prices begin to fall. Because of the surplus of goods and fallingprices consumption becomes more loveable to consumers and the level of consumerspending rises. The fall in prices causes business to become less(prenominal) profitableand producers decrease the level of production. This results in the decrease ofthe aggregate standard supplied to decrease. This continues until aggregatequantity demanded equal the aggregate quantity supplied and a utmost of short-run equilibrium is established. The real GDP and the price level have bothdecreased from the original long-run equilibrium level and the thrift isoperating under the full employment level. At this point the U.S. economy is ata recessionary gap and a monetary polity must be used to pull the economy fromthe present-day(prenominal) recession.thither are trine options that the Federal view as has to try and end thecurrent recession. The federal funds rate could be lowered, the discount tobanks could be lowered, or o pen market operations could be used. The mosteffective of these three options is the use of expansionary monetary policythrough open market operations. The eldest step in this option is for theFederal Reserve to start to procure bonds from consumers. As the FederalReserve begins to buy these bonds back the bond prices are increased to make theselling of these bonds more attractive to consumers. When the Federal Reservepurchases a bond from a consumer a civilise is issued to the seller for the holdprice. This higher bond prices also lowers interest rates. The seller thendeposits this check into his/her bank. This action increases deposits in the