1. You should realize how important it is for economists to try and predict future conditions of...

Question:

1. You should realize how important it is for economists to try and predict future conditions of the U.S. economy. Economists are also interested in the performance of the economy at a more local level. Discuss how local and national forecasts play an important role in the State and Federal levels. There have been significant discussions on the government's fiscal policy during the Great Recession. In particular, many did not like the government's actions in salvaging the auto industry in providing guaranteed loans to GM and Chrysler. What is your opinion? Provide economic reasons for your opinion

Fiscal Policy

The policy related to tax collection and imposition is the fiscal policy. The government takes various decisions to maintain the purchasing power of the people. For this, tax rates, government expenditure, and others are changed to meet the desired objectives.

Answer and Explanation:

Local and national forecast play a major role because they help both the state and Federal Governments to formulate policies and strategies. They can decide on which sector to focus, what will be the estimated revenue, where expenditure is to be done, and others. This helps make effective monetary and fiscal policy to keep economy stable and growing.

The government's decision to salvage the auto industry is not wrong. That was the need of the moment and the government took the right steps to support the industry. Reasons for this opinion are:

  • The cash flows of the companies at the time of recession were negative. This forced them to pay low dividends and raise capital from outside at a high cost.
  • The companies were not able to get loans easily as their creditworthiness deteriorated after the recession.
  • The automotive industry of the United States is highly cyclical and the competition was increasing in the domestic market.
  • With so much damage that occurred during the recession, it became difficult for the companies to return to their previous levels of profit and income. Also their market share was declining.

Learn more about this topic:

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What is Fiscal Policy?

from Political Science 102: American Government

Chapter 14 / Lesson 3
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