The GDP is a measure of the economic growth of a country (Pride, Hughes & Kapoor, 2010). It is applied as a quarterly indicator of all business activities as it measures the business cycle. Business cycle includes four phases where the economic growth can be classified as either growing or declining.
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The four stages are the contraction, recession, expansion, and the peak (Pride, Hughes & Kapoor, 2010). The period in the slowdown of an economy is named the contraction; the recession is the period when the economy is at the bottom. In other words, it can be said to be the period between the expansion and contraction period.
Expansion is the time when the economy is growing while the peak is the climax of the economy. The Federal Reserve uses the GDP to determine when the change in the interest rates is required (Pride, Hughes & Kapoor, 2010).
For instance, when contraction starts the Federal Reserve lowers the interest rates to allow the expansion of the economy. When the expansion has gained momentum, the Federal Reserve increases the interest rate with the aimed of avoiding peak. If the peak is allowed the market is bound to receive shock and ultimately collapse.
The government is made up of several bodies that are used to determine the national policies with the aim of stabilizing the economy. For instance, the Department of Treasury is endowed with the mandate of constructing and implementation of the fiscal policies ( Escobedo, 2009).
The Office of the President of the USA is entitled to make decisions that deal directly on the fiscal policies. The Office of the Management and Budgetary is concerned with the role of developing and analyzing the fiscal policies. The auditing of the fiscal policies is carried by the Government Accountability Office.
These bodies are concerned with interest rates, tax rates and government spending with the aim of controlling the performance of economy. The Internal Revenue Service (IRS) is entitled with the role of setting “sales taxes for goods and services taking place” ( Escobedo, 2009). It is also involved in taxing the USA citizens.
The Federal Reserve is concerned with the regulation of money supply with the aim of controlling and keeping down inflation (Pride, Hughes & Kapoor, 2010). These bodies all work towards the regulation and stabilization of economy.
Fiscal policies are more concerned with tax and interest rates system of a country. The decisions made may affect the employment and production. According to the Keynesian school of thought, fiscal policy has effects on employment, output and the aggregate demand (Riley, 2006).
Through the cut of taxes and increase in planned government spending, fiscal policy can be applied in stimulating the aggregate demand (Riley, 2006). When expansionary fiscal policy is applied, interest rates increase lowering the rate of investment. This reduces production because of reduced employment rate.
Changes in Government spending may involve moderate or excessive spending. When the government spends excessively above the required spending the economic growth diminishes.
When the spending that could have stimulated the economy is applied on other sectors like construction of transport infrastructure which has positive impact on economy, the diversion of funds affects the production negatively. According to Garfield (1995) government spending is bound to reduce the labor force participation thus increasing the rates of unemployment.
Excessive spending by the government lowers the productivity growth through the hindrance of capital accumulation and innovation (Garfield, 1995). Increase in the taxes reduces the rate of investment thus creating unemployment and inflation. When the investment is low, then production is also low.
Government can use taxes in terms of allowances in stimulating economy through research. This attracts both domestic and foreign investors increasing production and employment. Both government spending and taxes can used to stimulate economy through innovation, adoption of new technology, social infrastructure development among others. This in turn creates employment and increases production.
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Escobedo, P. (2009). What’s so important about our Gross Domestic Policy. Web.
Garfield, R. (1995). Government Spending and Economic Growth. Web.
Pride, W. M., Hughes, R. J., & Kapoor, J. R. (2010). Business. Mason, Ohio: South-Western Cengage Learning.
Riley, G. (2006). Fiscal Policy Effects. Web.