Understanding how the economy is measured and what affects economic growth is a key part of understanding the challenging financial and even political issues that confront the nation today. The gross domestic product (GDP) is used as a coincident indicator when measuring business cycles. This means that GDP peaks and bottoms out at approximately the same time as the economy as a whole. Leading indicators, which provide early signs of turning points in business cycles, include money supply and new unemployment claims. Lagging indicators, including interest rate spread and commercial loans outstanding, trail the turning points of the cycle (Pailwar, 2010).
Fiscal policy focuses on the government's spending and revenue policies, including taxation and issuing debt. Congress passes the nation's budget, including taxes; this budget is based on an advisory budget submitted by the president. Debt in the form of bonds is issued by the US Treasury (Evans, 2011).
Increasing government spending, such as on building new highways, is a fiscal policy used when the economy is in recession to stimulate the economy. The highway contracts are awarded to businesses that then hire or expand their workforce, and whose workers then use the money to purchase goods and services. The multiplier effect then offsets the initial government investment. Lowering taxes gives companies more money to invest in their businesses, and consumers more money to purchase goods and services. During inflationary times, the opposite fiscal policy strategies are available (Gwartney, Stroup, Sobel, & MacPherson, 2009).
Evans, G. R. (2011). U. S. Government Fiscal Policy. Retrieved August 15, 2011, from Mudd Economics: http://www2.hmc.edu/~evans/e53l13.pdf.
Gwartney, J. D., Stroup, R. L., Sobel, R. S., & MacPherson, D. (2009). Economics: Private and Public Choice. Mason, OH: South-Weste
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