President’s Dilemma Reflection

In the last month in our IB HL Economics we have been working on our President’s Dilemma project, a project where we are given a mock dilemma of stagflation in the U.S. economy and are tasked with solving unemployment and inflation by enacting policies in the economy. In a group with 2 other members we collaborated in order to come up with a set of policies we believed would help assist in ending both unemployment and inflation in the economy. We divided our policies into two sections with both short run goals and long run goals.

Short-Run Goals

In the short run we aimed to reallocate spending from overseas in order to try and create a safety net for the unemployed in the economy. We did this because we believed that by immediately solving unemployment we could boost the production of firms and overall output in the economy. We then provided incentives to the unemployed and to hiring firms to encourage working jobs. For the unemployed we offered to subsidize the expenses involved in moving to areas with work to try and encourage workers to actively seek jobs. Then, to encourage employment by the firms we chose to give half of the unemployed benefits of newly hired workers to the firm for the first year of employment. By doing this we hoped to ease the employment costs of firms given the recent inflation in the economy. By doing this we hoped to quickly boost back the supply and employment in the economy. Additionally, we chose to lower interest rates to try and increase economic activity and increase spending in the economy so that we could create stability in the economy to support our long-run goals.

Long-Run Goals:

In the long run we looked at using reallocated funds no longer going to the unemployed in order to boost spending on education and job training to try and ensure that a new generation of workers is trained and educated to work in a variety of positions. By having the ability to work in a number of jobs, workers in the economy would be able to switch jobs easily if large-scale layoffs were to affect workers in the future. In addition, by spending more on future education we’re hoping to provide a smarter workforce, though with obvious lagging benefits, that will be able to cope with economic dilemmas.

Reflection:

In the end I believe we performed very well in front of the board of advisors. We presented our policies and were able to defend our decisions during the question and answer session that followed. I believe this was because we fully supported the ideas we we’re promoting and were able to understand how they affected the economy. What this came down to specifically was an evaluation of stakeholders in the economy. When we designed our policies our goals aimed at providing support for every concerned population (the government, the unemployed, the retired and the corporations). We did this knowing that by playing strongly to any single population’s demands we would be impairing the other three. Because of this we spent a lot of our time designing our policies in a unique way to ensure everyone was benefitted in the short-run to their immediate satisfaction, and that we were still able to provide economic stability and control in the long-run. We did this knowing that the stakeholders of our economic policies in the dilemma were everybody, and that our goals as advisors was to ensure that those affected were not upset or impaired in anyway.

In the future I believe I would do everything in the same was as we did for this project: we created our goals, addressed those in a priority of severity of need, and ultimately concluded with a set of policies that was effective in providing stability and support to all sectors of the economy.

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How Can Supply and Demand-Side Policies be Used to Assist Businesses?

An important concern for all economists is protecting the industries in an economy. Without adequate industries and businesses, an economy can not reach it’s full output potential, and suffers. In order to ensure that these corporations are able to survive in the economy, the government can enact a number of fiscal and monetary policies (covered in the last two posts). These include policies that are both supply-side and demand-side.

A supply-side policy is a policy aimed at regulating the aggregate supply of an economy. This can include both fiscal and monetary policies. A fiscal supply-side policy is a policy aimed at supporting industry growth and change. This includes government spending to increase private research and development in order to increase the economy’s efficiency, increasing AS. Additionally, The government can cut business taxes to allow more business spending and expansions, or even improve transit systems to reduce business costs. A  monetary supply-side policy is a policy aimed at regulating the flow of capital in the economy. By either bringing more capital into or draining money out of the economy, the government can alter the money flow and therefore regulate the AS in the economy.

A demand-side policy is a policy aimed at regulating the aggregate demand of the economy. This can include both fiscal and monetary policies, covered in previous blog posts (see below). These policies look at altering the AD of an economy in order ensure consumer security by preventing (or provoking) a recession or inflation.

In order to protect business in the economy a government can reduce production costs associated with the aggregate supply and increase aggregate demand in order to increase consumer spending. By improving the economy’s infrastructure and reducing business tax and production costs (like wages), a government can reduce the aggregate supply of the economy. Then, by increasing spending on consumer benefits, such as working incentives, the government can move the AD in order to protect the businesses in the economy.

How Can Fiscal Policies Be Used to Protect the Working Class?

In economics, many economists worry about the protection of the working middle class. This sector of the economy is generally understood to be very sensitive to economic adjustments. Any drastic changes in the aggregate demand or aggregate supply of an economy has been shown to have the most substantial impacts on the middle class. In addition, the middle class generally makes up the majority of the economy, meaning that if it is put under economic stresses, the entire economy suffers.

For this reason economists commonly devise fiscal policies to try and protect the middle class and it’s workers. A fiscal policy is a policy aimed at controlling the AD by increasing or decreasing government spending and taxation. The government can use these policies to protect the middle class by a number of means. By granting them tax deductions, the government is able to increase the real income of the middle class workers. By increasing spending on middle class benefits such as health and safety plans aimed at protecting the unemployed, the government is also able to protect the middle class.

Section 3.3 and 3.4 Formative Reflection

In studying Supply-side and Demand-side policies in lessons 3.3 and 3.4, I was able to learn a lot about the effects of government intervention through both fiscal and monetary policies in the economy. A fiscal policy is a policy enacted by the government to alter taxes, spending, and the flow of capital. By raising or lowering taxes while increasing or decreasing government spending, fiscal policies are able to regulate an economy’s demand. Additionally, by controlling the flow of capital in an economy with payouts, a government can regulate an economy’s supply as well. A monetary policy is a policy that alters the interest rates in an economy. This can increase or decrease the consumer’s disposable income, thus regulating the demand within an economy.

Neoclassical economics argues that governments should have limited or no intervention in the economy, and that any intervention only serves to worsen the state of the economy. Contrary to this, Keynesian economics argues that governments should play an active role in regulating an economy’s supply and demand. In the formative examination, I scored myself with an 8/10. I did this feeling I had a strong  understanding of the macroeconomic concepts discussed in class. I was able to identify how demand and supply adjustment were able to create inflation in an economy. In my analysis of the situation however I failed to provide real world examples to link my knowledge of the concepts to the real world. I believe that in the upcoming summative assessment I will provide examples to show how my understand is applicable to the modern world.