WEEK 12 ASSIGMENT ECO 252-02 W

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Running head: FISCAL POLICY WEEK XII ASSIGMENT #10 Lucas M. Maccarini Principles of Macroeconomics Instructor: Ryan Kearns November 6, 2020 Coastal Carolina Community College ECO 252-02 W

FISCAL POLICY 2 11.1 Fiscal policy Part 1: Contractionary Fiscal Policy - Study the chart below and answer the questions that follow. 1. Describe the level of inflation experienced in Argentina between 2010 and 2015 compared to that experienced by the United States. Which country is achieving an inflation rate closer to the “target” rate? Given the above graphic of inflation, we can observe that the inflation rate of Argentina rose from approximates of 10% to a high of 24% between the years 2010 and 2015, this degree of rise can be described as a running inflation. For the case with the USA, the degree of change in inflation is relatively low as depicted by the graph; this can be described as a creeping inflation. As to the numerical levels of inflation rates, Argentina would be described to have a relatively higher inflation rates as would be compared to the US.

FISCAL POLICY 3 Therefore, it is fair to conclude the US is achieving an inflation rate closer to what is generally considered as the target rate than Argentina. (The target rate is set around 2 %) 2. Outline two possible causes of the higher than desired rate of inflation experienced by Argentina. Certainly, the expansionary policies emplaced by the government to boost the demand across the country are one of the reasons for the prices to rise, therefore inducing inflation. Another cause could be attributed to a rise in the production cost in the country. With higher cost producers are forced to increase their prices to absorb the increase in their cost. Now in reality based in the fact I am from Argentina (I left in 2010) the government policies like retention to exports and higher taxes to the agricultural industry are one of the main factors that caused an inflation from which the country never recovered. (extra facts I felt obligated to share with you professor) 3. Study the chart below and answer the questions that follow

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FISCAL POLICY 4 a. What has been the relationship between Argentina’s inflation rate and its real GDP growth rate between 2010 and 2015? The relationship observed in this case it’s a “Inverse Relationship”. The increase in the inflation experienced by Argentina in the inflationary rate decreased its GDP growth rate between 2010 and 2015. Therefore, an inverse or negative relationship can be observed. b. Explain why low and stable inflation can contribute to a higher rate of real GDP growth in a nation. As we learned over the past weeks, low inflation contributes towards economic stability – which encourages saving, investment, economic growth, and helps maintain international competitiveness. In other words, it makes the nation economy more competitive for the international market, attracting local and foreign investors and producing more competitive goods for internal consumption and exports. Ultimately reaching a higher growth rate in its real GDP. c. Based on the data in this chart, what is the most likely cause of Argentina’s inflation, demand-pull or cost-push? Explain. In the case of Argentina, it can be attributed to a rise in prices of the production factors forced by the increase of taxation by the government to certain exports. This limited the supply producers were willing to sell for national consumption, creating a shortage in the internal market and rising prices. Therefore, a Demand-Pull inflation occurred. 4. Using an AD/AS diagram, illustrate the cause of Argentina’s inflation you described in #3 c). Identify Argentina’s “inflationary gap”.

FISCAL POLICY 5 In graphic A we observe how the expectative of higher prices will affect the AD and the gap between Yo and Yi over the horizontal axis becomes the inflationary gap. Graphic B is discussed in answer #7 5. Assume the government of Argentina wished to use discretionary fiscal policies to reduce its inflation rate. Outline the options available to the government. Some of the options Argentinian government could employ under discretionary fiscal policies consists of deliberate changes in government spending and taxation designed to achieve full employment, control inflation, and encourage economic growth. 6. Describe the mechanism through which a contractionary fiscal policy could help Argentina close its inflationary gap. Argentinian government may choose to use contractionary fiscal policy to help reduce an inflationary gap, through decreasing the number of funds circulating within the economy. This can be accomplished through reductions in government spending, tax increases, bond and securities issues, and transfer payment reductions.

FISCAL POLICY 6 7. Show the effects of the contractionary fiscal policy on the diagram you drew in #4. If a contractionary fiscal policy would be employed, the AD would shift left reducing the real GDP and reaching a new equilibrium price which would also result in a reduction of the inflationary gap. However, a recession could occur as the AS curve also shift left as producers face higher costs in addition to government contractionary policies as depicted in graphic (B) 8. Explain why the use of contractionary fiscal policy may be unpopular among the citizens and voters in Argentina. Contractionary fiscal policy occurs when the government either cuts spending or raises taxes. Gets its name from the way it contracts the economy. It also reduces the amount of money available for businesses and consumers to spend. In other words, it takes money out of consumers' hands cuts subsidies, contracts for public works, or the number of governments employees. Therefore, it gives consumers less purchasing power which reduces business profit, forcing companies to cut employment. So, it is not a surprise the unpopularity among citizens and voters in general, not just Argentina. 9. Explain the impact the contractionary fiscal policy will have on unemployment and nominal GDP in Argentina. The first impact was a rapid increase of unemployment rates, mainly due firms and small businesses cuts in their labor force in order to save costs. Second and most important, in the long run, the debt-to-GDP ratio is unsustainable. And in the case of Argentina the country is currently in a technical default completely unable to repaid the nation multiple loans and bonds contracted over the past decade. 10. Assuming the contractionary fiscal policy succeeds at bringing down Argentina’s inflation rate, how could this benefit Argentina’s real GDP growth rate in the long-run?

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FISCAL POLICY 7 In theory, it would’ve drive up prices in investments creating what’s known as an asset bubble. It also supposed to lower unemployment to below the NRU. This cause employers struggle to find enough workers to meet market demand. That slows growth from the production side keeping the GDP rate between a healthy annual rate of 2-3 %. However, in the long term it would lead to a recession which is an inevitable part of the economic cycle.

FISCAL POLICY 8 References O'Sullivan, A., Sheffrin, S. M., & Perez, S. J. (2020). 13 and 14. In Macroeconomics: Principles, applications, and tools . New York, NY: Pearson. Course Lecture 6 provided by Professor Kearns

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