Economics

Economics

Introduction

This paper intends to explore the major functions of US government and the Central bank of US, which is FED. The major focus of this paper is on answering the given four questions. These questions are about source of revenue generation for government and areas where it is spent. Further, it discusses about the major tools of monetary policy and fiscal policy. Moreover, it examines that how Fed may take action in order to reduce prevailing inflation in the economy. In addition to this, the last question enlightens about the lags encountered by monetary and fiscal policy and that how policy makers are dealing with it.

Discussion

What is the largest source of revenue for the U.S. government? What is the largest expenditure for the U.S.? Do you think these budget priorities are correct? Explain.

Largest Source of Revenue

The general source of revenue for the US federal government is taxes. However there are various kinds of taxes, among which the largest source of revenue is individual income tax and payroll taxes, which accounts for 82% out of all revenues in the year 2010. (taxpolicycenter.org). Further, there are other revenue sources, such as excise taxes, corporate taxes, custom duties and many others. IT can further be illustrated by the following figure;

Largest Expenditure

In order to finance numerous public services US government collects taxes as mentioned above. It is imperative to examine that where government spends the money that it collects in the form of taxes. In the year 2011, President Obama formulated the budget and spent $3.6trillion, which accounts for 24% of United States GDP. However, due to financial turmoil and economic downturn the expenditure, as a share of GDP remained high (cbpp.org, 2012).

Among all the expenditures, most of the allocated budget is spent on defense and international security assistance, which accounts for 20 percent of the budget or $ 718 billion. The reason this allocation is the largest because of the ongoing war operation in Afghanistan and Iraq. The funding for defense in these areas was accounted to $ 159 billion in 2011 (cbpp.org, 2012). In my opinion, government should lower down the defense expenses and instead spend those funds in investment that may in turn yield a fruitful result. The detailed illustration can be seen in the following figure.

Assume you are an advisor to President Obama. What fiscal policy tools could be used to stimulate the economy? Now assume you are an advisor to Ben Bernake. What specific tools can the Federal Reserve use to stimulate the economy and increase economic growth. Please identify at least two tools.

Being an advisor to the President Obama, in terms of fiscal policy tools, I would suggest employing the fiscal policy tools of taxes and government spending. Since these are the tools that affects the demand and may stimulate the economy if these are used efficiently and effectively. Thus, government must change the composition of taxes and expenditure and closely examine to ensure the growth of the economy. More public expenditures shall contribute to ...