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

Actions of the regimen activity and The Increase in PricesThe United States economy is currently producing at a level of fullemployment in long-run vestibular sense. The government and so decides to increasetaxes and to reduce government outgo in an effort to balance wheel the budget. Theresults of the actions taken by the government is the decline of real GDP.When taxes are change magnitude that the amount of disposable income that is availableto consumers is lowered. This lowered level of disposable income leads to adecrease in consumption expending as well as a decrease in savings. Thisdecrease in consumer and government spending causes the total spending todecrease by a multiplied amount, As a result of the decrease in total spendingthe substance demand decreases and the aggregate demand curve shifts to the left.This decrease in consumer and government spending also causes businesses to havea surplus of inventories. At this shew the output is greater than spending and as a result prices take off to fall. Because of the surplus of goods and fallingprices consumption becomes more desirable to consumers and the level of consumerspending rises. The fall in prices causes business to become less profitableand producers decrease the level of production. This results in the decrease ofthe aggregate criterion supplied to decrease. This continues until aggregatequantity demanded equal the aggregate quantity supplied and a period of short-run equilibrium is established. The real GDP and the price level have bothreduced from the original long-run equilibrium level and the economy isoperating chthonian the full employment level. At this point the U.S. economy is ata recessionary gap and a pecuniary policy must be used to pull the economy fromthe current recession.There are lead options that the federal official Reserve has to try and end thecurrent recession. The federal gold rate could be lowered, the discount tobanks could be lowered, or open market pl ace operations could be used. The mosteffective of these three options is the use of expansionary monetary policythrough open market operations. The first step in this option is for theFederal Reserve to start to purchase draw together certificates from consumers. As the FederalReserve begins to buy these bonds back the bond prices are increased to come to theselling of these bonds more attractive to consumers. When the Federal Reservepurchases a bond from a consumer a check is issued to the seller for the agreedprice. This higher bond prices also lowers interest rates. The seller thendeposits this check into his/her bank. This action increases deposits in the