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

Actions of the Government and The Increase in PricesThe United States economy is currently producing at a level of full habit in long-run equilibrium. The disposal 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 go down of real GDP.When taxes are 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 total spending todecrease by a compute 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 havea intemperance of inventories. At this depute the output is greater than spending andas a result footings begin to f all. 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 quantity 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 bothdecreased from the original long-run equilibrium level and the economy isoperating under the full employment level. At this point the U.S. economy is ata recessionary gap and a monetary policy must be used to pull the economy fromthe current recession. at that place are three options that the Federal Reserve has to try and end thecurrent recession. The federal funds rate could be lowered, the discount tobanks could be lowered, or make market operations could be used. The mosteffect ive 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 bonds from consumers. As the FederalReserve begins to buy these bonds back the bond prices are increased to make the change 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 use up rates. The seller thendeposits this check into his/her bank. This action increases deposits in the