Measuring_Economic_Health_Memo

Memo To: Jocelyn Burton From: Derrick Cohen CC: Date: [ 5/19/2010 ] Re: Measuring Economic Health Economic health is best understood by learning the importance of gross domestic product also known as GDP, fiscal policies’ effect on the economy, and the roles of government bodies that determine national fiscal policies. All of which are necessary to understanding the true works of the economy. GDP to Describe Business Cycle According to Mankiw,The Gross Domestic Production in connected to the business cycle in a way that they travel along the same path and what happens with the GDP has a direct impact on the outcome of the cycle. When there is a rise in the GDP there is an expansion in the business cycle which gives them a period of growth. When there is a fall in the GDP it can lead to the business cycle experiencing a period of recession. The fiscal policy refers to the government's choice regarding the overall level of government purchases or taxes.   The fiscal policies can have a direct influence on aggregate demand. Because of this our economy is directly affected every time our government makes changes to our fiscal policies, government spending, and our taxes. Gov’t Bodies that Determine Fiscal Policies   The government, being a vast entity in itself, is made up of several different bodies and each plays a different role in determining national fiscal policies. The Department of Treasury is one of these bodies.   They construct and manage and implement the fiscal policies.   The Office of Management and Budget develops and analysis the fiscal policies.   The Office of the President of the United States is responsible for making the decisions on the fiscal policies. Also the Government Accountability Office must audit the fiscal policies. The fiscal policies that are implemented in the United States have a tremendous impact on the behavior and decision making of Americans.   In the short run, these policy instruments can change the aggregate demand for goods and services, and as a result alter the economy's production and employment. Changes in attitude by both households and firms shift aggregate demand.   If the government is lax in their response to this there is potential for very bad results, for example unnecessary fluctuation in output and employment. Undoubtedly, the fiscal policies have tremendous effects on individual behavior and everyday decisions made by households as well as businesses. A change tax schedules has direct effect in cost of production and the bottom-line for corporations or net income for individuals. Fiscal Policies and Employment One of fiscal policy component is taxation. An increase in taxes results in reduced net income. Organizations look into profitability factors and value of labor force in comparison to return on investment for use of technology or outsourcing tasks otherwise performed internally or domestically. Conversely, individuals may perceive an increase in tax as a form of punishment, which can lead to promotion of more black market labor (cash labor). Of course, a decrease in taxes may lead to further domestic hiring and lesser black market labor. Equally, it is important to note that changes in taxation policies, as a part of the fiscal monetary policy, can have significant effects on the intensity of employment market, and overall efficiency and productivity. The fiscal monetary policy of the government plays a crucial role on employment factors. Fiscal Policies and Production Interest rate is another component of the fiscal policy. Adjusting the interest rate can have adverse or favorable impact on production. To clarify, adverse in monetary policy is not negative connotation, and favorable is not a positive suggestion. In the monetary policy when market is collapsing too fast the government may want to have an adverse result to bring the market under control. Change in interest rates alters velocity of "cash." Meaning, when interest rates hike, cash becomes scarce and credit tightens, as a result, monetary expansion becomes limited and production decreases. On the other hand, when interest rates decline, cash becomes more available and credit loosens, as a result, monetary expansion becomes more vibrant and production increases References Mankiw, Gregory N. Principles of Economics 4ed. 2007. Cengage Learning.