Business EconomicsExam II6 out of 10 questionsQuestion # 3 – Based on the experience of U. S. economic policy, it is observed that whenever Congress decides to increase the rate of government spending, gross private investment spending tends to decrease. a) Please explain why. As government becomes more empowered by spending more, the private sector seems to become less so. Gross private investment spending may decrease with an increasing rate of government spending more likely because “government spending displaces private-sector activity” (Mitchell). This happens when more money is allocated for the government’s use and implementation rather than for the individuals’ use and implementation.
Historically, as Congress has decided to fund international warfare, such as in Iraq, less money went toward educating school children and taking care of the individual homeless individuals in our very own country. The government seems to win. The U. S. citizens seem to lose out when they find themselves without a voice. Mitchell, Daniel J. The Impact of Government Spending on Economic Growth. The Heritage Foundation Backgrounder. No. 1831 (18 March 2005). 5 Sept. 2007 < http: //www. heritage. org/Research/Budget/bg1831.cfm> . b) What should the Fed do to reverse the decrease in gross private investment spending? To reverse the decrease in gross private investment spending, the Fed should allocate more funding toward individual programs and families; it could also offer a lower interest rate.
Because the higher the interest rates and the less empowered the U. S. citizens seem, the “more muted” (Philpott 15) becomes the desire of the individual families to act as productive shoppers and consumers. When life seems expensive, the less becomes the desire to invest in one’s self. Thus, the Fed could, in addition to lowering interest rates, offer other forms of incentives by spending less itself and letting the individual consumers spend, buy, invest, and shop in order to increase the welfare and well-being of family.
Instead of making individuals work more hours, the Fed could find more positive ways to increase levels of desire to work. Thus, “productivity” (Philpott 15) and the satisfaction of working increase in relation to one another. And, it becomes important for the Fed, to reverse the decrease in gross private investment spending, to proactively limit “the burden of government” (Mitchell) on the people of the United States.
Mitchell, Daniel J. The Impact of Government Spending on Economic Growth. The Heritage Foundation Backgrounder. No. 1831 (18 March 2005). 5 Sept. 2007 < http: //www. heritage. org/Research/Budget/bg1831.cfm> . Philpott, John. “This year may be nice but it won’t be easy. ” Personnel Today Jan. 2004: 15. c) Thus, what would be the resulting effects of an increase in government spending accompanied by a policy push for an increase in gross private investment spending? Once the individual U. S. citizens become empowered through the increase of gross private investment spending, the resulting effects would appear in the form of national pride and “optimism” (Mitchell).
Give a sense of control and decision making to the individual citizens and another effect would be a movement toward “prosperity” (Mitchell). Individuals would feel a sense of enrichment, not only in their pocketbooks and wallets, but also in their internal emotional states. Also, an increase in gross private investment spending could lead to more individuals finding themselves gainfully employed as “extra jobs … [are] created” (Philpott 15).