It was in the year of 1929 when the American Economy had faced the worst economic situation in their entire history (Davis, 2009). This was the major setback no one had envisaged. But since this event, the political and economic thinkers have been very cautious of how to go about any change in the system of policies without having a detrimental effect on the economy. The welfare of any society heavily depends on the economy of a country, both socially and economically. Economically, an environment which is predictable and has stability make people more content. If they have a stable job and have the basic necessities, then they would not want the government to hatch out a long-term budget plan that would risk the stability of their economic situation. Economic policies are vital for the betterment and development of the society.
There are times when the federal government hatches a budget plan which has great implications and ramifications. When the budget plan is for a number of years, then there is a high probability that the national debt would substantially increase. These plans should be without putting the economy at too much risk. There should be backup plans to ensure that the national debt would not create a similar situation as that created in the 1930s. The classical economics is similar to the situation that when a federal government puts an economy at risk by planning a long-term budget scheme which would eventually put the economy at the risk of national debt. The demand is created by its supply and that is the concept of macroeconomics. This budget plan by the government implies that there would be a lot of spending, and this would, by extension, imply that the spending by the government has been increasing over the years. The aggregate or collective and total demand has been increased when there is a spending of this magnitude. The government seems to think that the aggregate supply would definitely follow when the aggregate demand in increased. In the supply and demand curve, the curve of the aggregate supply will begin to go towards the right side of the graph. The employability rate would eventually increase when there is an increase in the investment. This increase in investment will take place if there is an increase in output. This can be viewed in two perspectives: the long term and the short term. Although in the short term, people would have an increase in the salary and more people would have employment due to spending, but this will have an adverse effect on the generation that would follow them. The taxes on the posterity would be high and this would eventually lead to more debts.
When the federal government ratifies new quotas and tariffs, especially on the demanded imports, this policy results in an increase in the imports’ rates and prices. This is mainly done in order to make the indigenous industries to flourish in America and give them a chance to make themselves stable in the market. The indigenous industries face immense competition from the established and powerful foreign companies and to make the local industry powerful, these policies are ratified. The sales of the American based companies and industries will be protected and augmented. This will happen in the short term. There is also the factor of the efficiency of the goods being produced. When there is less competition from the foreign industries, and people would only be dependent on the local industries, the quality will not be as good as in the cases when there is a severe competition because one makes the other reach their full potential. When the tariff policy is applied, the result is that there is a considerable amount of fewer goods being brought from the foreign countries and the prices would get increased. When there is a high price, the indigenous industries and companies will be producing more. This will eventually lead to the increase in the prices for the consumers. In any case of the implementation of tariff policy, the people are affected, since they have to pay more for the same thing. The local companies are not willing to lower the prices because they have no competition in the market. The effects in the economy will be that the local people will have jobs in their hands. The rate of gross domestic product will stabilize and there will not be any increase in the rate of unemployment.
When the people sense that the people who are governing over them are incapable of stabilizing the economy, the people start to refrain from spending money on things. This will lead to the decrease in the aggregate demand. The decline in the aggregate supply will follow the decrease in the aggregate demand. There will be the decrease in the income and salary of people because when the output is decreased, there will be no jobs for the people. This distrust in the ability of government will result in the decline of demand, decline in output will follow and the rate of unemployment will increase.
There is a pessimistic and an optimistic way of stabilizing the economy. When the government decides to put a decrement of taxes on the individuals who are earning less and there will be no decline in the taxes for the people who are making more than 250,000 dollars a year. This is a very pessimistic approach to stabilizing the economy since this will have an effect on the economy as well as the aggregate demand and aggregate supply. The inflation would cease and this will augment the rate of employability. The aggregate demand and supply will likely to increase because people would be spending more in this scenario. In his tenure, President Barack Obama did the similar thing (Nunns, Rohaly, & Center, 2013).
When people are not confident that economy will remain stable or not, then there is a decline in the investments. This happens because people are wary of the future of the business and them restraint themselves from investing. This result in a situation, when people start to invest, there will be an increase in the rate of interest. The rate of interest increases when there is less investment. Recession in the economy will take place in this situation.
There will appear a bubble in the economy of the country when the interest rates are retained. This similar thing happened in the depression of 2008, when banks, in the year of 2001, started to give loans to people easily and at that time, the rates of interest were quite low. When the bubble started to appear in 2008, the rates of interest touched the skies. People were not able to afford what they were possessing at that time (Chang, Stuckler, Yip, & Gunnell, 2013). The depression and the recession of 2008 is the prime example when the rates of interests are kept low for a considerable period of time and by giving people loans, then the bubble will definitely appear and crashing the entire economy.
There will be an increase in employment for the short term and debts on the posterity in the long term when the federal government makes a budget plan which expands through a considerable period of time.
The tariff policy means people will have jobs and rate of GDP will get stabilized. Also, local companies will get benefitted by this policy.
The unemployment rate will increase and there will be a decline in aggregate demand and supply when people have no confidence in their leaders.
The aggregate demand and will increase with the stimulation of the economy.
The interest rate will increase when there is a decline in investments.
The bubble will appear more likely if rates of interests are low.
Chang, S.-S., Stuckler, D., Yip, P., & Gunnell, D. (2013). Impact of 2008 global economic crisis on suicide: time trend study in 54 countries. BMJ, 347, f5239.
Davis, B. (2009). What’s Global Recession. The Wall Street Journal.
Nunns, J., Rohaly, J., & Center, U.-B. T. P. (2013). Tax Provisions in the American Taxpayer Relief Act of 2012 (ATRA). Washington, DC: Urban-Brookings Tax Policy Center.