Question

Scenario 3: The nation is currently experiencing a period of rising prices. Inflation is making consumer goods increasingly difficult to afford as wages have remained constant.

1. As a member of Congress, what changes would you suggest to fiscal policy to balance the budget and indirectly address inflation? Suggest at least two specific changes to revenue and expenditures.

2.What are the benefits and opportunity costs of the changes you propose? Consider the impact on economic growth, price stability, and unemployment.

3.Are the proposed policies contractionary or expansionary? Explain.

Answer 1

As a member of Congress, I would suggest two specific changes to revenue and expenditures to address inflation and balance the budget. First, we could increase revenue by reforming the tax system to increase the top marginal tax rate for the wealthiest individuals and corporations. This would generate additional revenue for the government, which could be used to pay down the national debt and reduce inflationary pressures. Second, we could reduce expenditures by implementing targeted spending cuts in areas where government spending is wasteful or unnecessary. This would free up funds for other important programs while also reducing the overall level of government debt.

The benefits of increasing revenue through tax reform and reducing expenditures through targeted spending cuts would be numerous. By reducing the national debt, we could stabilize the economy and reduce inflationary pressures, making consumer goods more affordable for all Americans. Additionally, these changes would allow the government to invest in important programs that promote economic growth and job creation, such as infrastructure development and education. However, there are also opportunity costs associated with these changes. Higher tax rates could discourage investment and entrepreneurship, while spending cuts could reduce funding for important social programs that benefit vulnerable populations. These costs must be weighed against the potential benefits of the proposed changes.

The proposed policies would be contractionary in nature, as they aim to reduce overall government spending and increase revenue. This approach is intended to slow down the growth of the economy in the short term in order to address inflationary pressures and balance the budget in the long term. While contractionary policies can be effective in reducing inflation, they may also have negative impacts on economic growth and employment in the short term. It is important to strike a balance between addressing immediate economic concerns and ensuring long-term fiscal sustainability.