Fiscal Policy-Defense Spending and Economic Stimulation

Essay by patricci10College, UndergraduateA, March 2008

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Fiscal Policy- Simulation � PAGE �7�

Running head: Fiscal Policy

Fiscal Policy- Simulation

Jim Morales

ECO 360 - Economics for Business I

Professor James Kirk

March 2, 2008


The Fiscal Policy Stimulation is designed to show how the impact of a change in government spending and taxes affects the real Gross Domestic Product and income of the economy. The practical exercise places the student in the roll of President of a small country called Erehwon. Erehwon is rich in mineral deposits and has a suitable climate for agriculture. Exports include fresh fruits, vegetables, processed foods, iron ore, bauxite and manganese. The underdeveloped industries are mining and processed foods. Tourism is a possible industry but certain improvements in the transportation and communications are needed to maximize that industry. The country lacks sufficient infrastructure such as roads and railroad. These are a necessity to connect the different cities. The country is also in need of ports for shipping, an efficient banking system, and communication infrastructure.

The issues that the President is faced with include: achieving economic growth, restraining government spending, developing adequate infrastructure and encouraging private enterprise. The Government History encompasses high budget deficits with weak infrastructure. The weak infrastructure is a problem since this is unfavorable for foreign investors. Education is a concern since the literacy level for males is 56% and only 35% for females. The country is facing a recession, unemployment is high, incomes are falling and public confidence needs to improve.

Changing Effects

The second scenario begins with the announcement of an inflationary problem in the economy. The scenario specifically states, "In the fourth year of office it has been decided to use fiscal policy measures to bring inflation down, which means reducing incomes in the economy." The decision was to not change government spending on the...