St. Charles Community College
ECON 100 Survey Economics
Answer to Class Discussion Question
Suppose you are the all-powerful economic czar of this country. Suppose your politics are such that you believe that our Federal government is too large. Suppose you want to expand the economy. How would you do this? (Think of as many techniques as you can.)
The key to this question is to think of economic variables, other than government spending, that can affect the size of an economy’s GDP. Then, when those variables have been identified, the idea is to determine how much that variable will affect the economy. Possible answers are:
- Through the Open Market Committee operations.
- Decreasing the reserve ratio. Don’t forget the money multiplier (See page 485 in the text.).
- By lowering the discount rate. Don’t forget the if the discount rate technique is used, the money multiplier is still an important factor in increasing the monay supply.
- A decrease in the personal tax rate has two advantages. It increases disposable income which in turn increases consumption through the marginal propensity to consume, and it increases the slope of the consumption function which increases the evpenditure multiplier which spurs the economy in many ways.
- A decrease in the corporate or other business taxes will increase corporate profits which could increase retained earnings and future investment.
- Remember the tax multiplier (- MPC/MPS).
- An example of this might be to increase the amount that households can place in an IRA or in a 401K program. Along that same time, you could make all IRA funds fully deductible as relates to Federal income taxes.
- As we discussed, an increase in saving means an increase in investment.
- Encourage suppliers to seek out export markets by making those markets more profitable and, therefore, more attractive.
- The expansion of these export markets should increase employment.
- An altering of our immigration policy could be initiated. This could be directed to specific industries such as the idea that was proposed to permit up to 200,000 computer specialists into this country.
- The changing of our Social Security Laws to change the amount that retirees on social security can earn without affecting their benefits.
- Giving federal tax credits to employers who hire potential employees who are currently on the welfare rolls. This may not be possible due to the restriction on this assignment that says that government spending must not be increased. This may have to be a formal government program in order to monitor such hiring to prevent mismanagement and fraud.