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Gross domestic product (GDP) in general has to be understood in order for us to understand the health of the economy. A business cycle describes changes in the demand-side of the economy as measured by GDP. The roles of our government bodies that determine national fiscal policies are very important in determining the measure of the business cycles. All these roles and policies are important in understanding national fiscal policies, and how the changes that the government dose impact our economy positively or negatively.
The GDP is a macroeconomic measure of the size of an economy adjusted for price changes and inflation, it is the “most closely watched economic statistic because it is thought to be the best single measure of a society’s economic well-being” (Mankiw, 2007, p.508). To evaluate our economy’s progress, GDP looks at the income that individuals make in our economy and how much they spent from that income, It also mergers the output of goods and services in our economy. The GDP looks and measures 4 separate areas of the economy, and those areas investment, government purchases, and net exports, GDP is very important to the economies business cycle.
Other changes that affect the business cycle are measured by “the production of goods and services or the number of people employed” (Mankiw, 2007, pg 13). The GDP is directly related to the business cycle calculations by measuring the variables of the total income of all goods and services produced and purchased in the economy. If the government increases the investment that means that inflation is altered which effects changing the GDP as well as thus the business cycle.
Our government chooses the government purchases and taxes in fiscal policy. When the government makes changes to our fiscal policies, government spending or our taxes, our economy will be directly affected. They must consider the influence these changes will have on how the prices of goods and services also the production in our economy will be affected. If the government is spending more money on building new bridges or increasing the money they spend on security, then the consumers’ taxes will raised to cover the costs.
Fiscal policy also affects employment rates production levels and interest rates. As long as the interest rates are normal for the average, then more purchases will be made, and that leads to more production to keep up the demand. All the decision that the government makes will have a circle effect on the entire economy. Maynard Keynes’s theory of liquidity sums up this cause-and-effect circle; “the interest rates adjust to bring money supply and money demand into balance” (Mankiw, 2007, pg. 779).
Government’s decisions on our economy can have a negative and positive impact. The affect will not be realized right away. Once the decisions are made it will affect our business cycle and can provide an increase in inflation, a decrease in unemployment, or decreases in interest rates.
Mankiw, N. (2007). Principles of Economics (4th ed.). Mason, OH: Thomson South-Western
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