Write a report with a proposed plan to balance the Federal Budget by either reducing expenditure or by increasing taxes. Evaluate the macroeconomic implications of both plans, qualitatively and more importantly, quantitatively.
Take on the role of a macroeconomist who will advise the President of the United States or a senator on fiscal policy.
The scenario to consider is the following: The US Congressional Budget Office (CBO) estimates that the US Budget deficit was about US$500 billion in the fiscal year 2014.
Assume a bill in Congress is approved during 2015 and it mandates a deficit reduction of US $500 billion during 2016.
Discuss two alternative ways to achieve this budget deficit reduction.
1. Reducing expenditure by $500 billion in 2016.
2. Increase taxes by this amount in 2016.
Write a report with the findings to these questions.
1. Explore the CBO website: https://www.cbo.gov/faqs#deficit and find estimates or forecasts on US nominal and real GDP for 2014, 2015, and 2016-2020.
2. Research and report evidence on what the size of the expenditure and tax multipliers in the US could be for the two budget reduction plans above.
3. Apply the theory of the Keynesian Cross to assess the impact of the hypothetical budget on real GDP by estimating the impact of these hypothetical plans on the GDP in: 2016, 2017, 2018, 2019, and 2020, cumulatively 2020 (in 5 years time), and in the very long term (infinite distant future).
4. Compare and discuss the outcome under the two scenarios of reducing expenditure and increasing taxes. Is one scenario obviously preferable to the other? Why? Could combining expenditure reductions and tax increases be preferable on purely economic grounds? What if we take political factors into account?
5. Discuss the implications of your findings for the United States Navy.
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