Introduction
Aggregate supply (AS) in an AD/AS diagram moves to the right as the economy grows over the long run due to rising productivity. Also, the full-employment level of GDP, represented by the vertical line, moves gradually to the right over time (Wan et al., 2022). AD/AS diagram A displays a pattern of economic growth over three years, illustrating this effect. Investment in physical and human capital, technological advancements, and the ability to take advantage of catch-up growth are all elements that influence an economy’s long-term growth rate, although they do not appear immediately in an AD/AS diagram.
Proposed Fiscal, Monetary, and Legislative Changes
The Federal Reserve regulates the money supply and the availability of credit through monetary policy. The policy’s primary objective is full employment, with secondary goals of price stability and reasonable long-term interest rates (Chugunov et al., 2021). The discount rate, open market operation, and reserve requirements are the instruments that will be used. The discount rate refers to the interest levied by the Federal Reserve to banks and other depository institutions for short-term loans.
Physical Policy Changes
Investment should be raised, and there ought to be a healthy balance between investment and interest rates. There need to be lucrative exchange rates, and there ought to be healthy trade balances. Inflation and manageable levels of public debt are two issues that need to be appropriately managed (Chugunov et al., 2021). Lastly, there should be a rise in the amount of investment made by businesses and an average increase in government spending.
Economic Impact of Fiscal, Monetary, and Legislative Changes
The benefits of the monetary policy described above and the fiscal policy that has been suggested are as follows. To begin, increasing the average level of government spending will ensure that the government does not waste money on spending that is not required but will spend money in profitable ways. Second, there will be an increase in corporate investments, which will unquestionably lead to an increase in the total number of jobs available, so contributing to the expansion of the economy (Chugunov et al., 2021). Third, a sustainable public debt will eventually result in a public debt that is manageable, which will in turn enhance the economy. As a result, having a balanced employment force results in a lower rate of unemployment or biased employment, which ultimately results in an improved economy.
Detailing the Costs of any Fiscal Policy or Legislative Changes
To illustrate the cost of the fiscal policy described above, which is the income that will be generated, there will be a significant amount of revenue generated by the monetary and fiscal adjustments described above in the following manners (Chugunov et al., 2021). First, the positive balance of trade, higher corporate investment, stable employment levels, average long-term interest rates, and other factors all contribute to the economy’s expanded capacity to generate new sources of revenue.
Tradeoffs that were Made
The current generation ended up paying a higher tax that lowered the debt burden of the government. As the debt burden of the government declined, future generations benefited as the burden of public debt falling on future generations declined (Chugunov et al., 2021). Inflationary pressures in the economy were eased, thus making Lenders, Savers, and Fixed income earners better off. This particular group of individuals is worse off due to higher inflation, thus this particular group of individuals benefited from the lowering of the inflation rate.
Conclusion
To maintain a stable and low inflation rate, the output gap that could lead to inflation is closed. It is good for business if inflation is low and consistent. To put it another way, when inflation is low and predictable, businesses and investors feel secure enough to put money into the economy (Chugunov et al., 2021). Consumers are more likely to spend money in the economy when inflation is low and predictable. Having a stable and low inflation rate helps domestic exports compete more successfully on global markets, leading to an increase in exports.
References
Wan, C., Ji, Y., Luo, Y., & Zhang, T. (2022). AS-AD Curves: An Analysis Using the BQ and OLS Methods.
Chugunov, I., Pasichnyi, M., Koroviy, V., Kaneva, T., & Nikitishin, A. (2021). Fiscal and monetary policy of economic development. European Journal of Sustainable Development, 10(1), 42-42.