Here is the 2nd classmate response needed

Econland Simulation

Phillip Cook posted Jan 19, 2021 12:38 PM

This was an interesting assignment that I ran through a couple of times before I started to understand how decisions were impacting the overall economy. In the first run-through, I made several poor decisions and had a low approval rating. As I began to understand how the decisions were impacting all aspects of the economy, I was able to make better decisions across the 7 years. In my final attempt, I scored high overall but made a poor decision, or lack thereof, in year 5 that dropped my approval rating. The inflation and unemployment were increasing while the GDP was decreasing, and I failed to take enough action in year 5 to correct these aspects. Overall, I was retained in the position for another term.

Real GDP growth year-1 increased from 2.5% to 3.8% as seen in the chart above. To achieve this growth, taxes were decreased on corporations from 30% to 26 % and the interest rate was reduced from 3% to .05% to motivate corporate investment. Additionally, government spending was increased from 30 Million to 33 Million. To offset the increase in government spending the income tax rate was increased from 24% to 27%. In previous simulations, I had increased the income tax higher, but the domestic consummation rate fell lowering GDP due to lower consumer revenues. The real GDP maintained a 2.6% growth rate for years 2 and 3. The growth rate was below the forecast of year 2 by .2% and exceed the forecast of year 3 by .6%. The decline in the GDP growth can be attributed to the increasing interest rates to offset inflation over the same period. Year-4 the real GDP increased 3.1% with a projected increase of 1.6. All variables from year 3 remained constant except interest rate increasing by .05% over year 2, and government expenditures increasing from $2 million annually to $3 million or from $37 to $40 million. This kept inflation down while increasing GDP. Year 5 real GDP suffered as it had a growth of only 1.5%. All decisions from year 4 carried over except, I decreased the government expenditures from a $3 million increase back to $2 million or $40 million to $42 million. I made this decision because year 4 had increased the deficit and I did not want to have back to back increases that could increase inflation. I should have kept the government expenditures increasing in $3 million intervals to support the increasing consumption. Year-6 real GDP growth was 2.7% on a forecast of 1.3%. To rebound from the previous year I lowered the interest rate from 2% to 1.5% and increased government spending from $42 million to $45 million. This motivated companies to invest and increase production. The final year’s real GDP increased 4.2% as seen in the graph above with a forecast of 2.0%. The interest rate was increased back to 2% to protect against inflation, and government spending increased from $45 million to $50 million.

The Unemployment rate began at 5% in year 0 as illustrated in the graph above. This rate fell in years 1 and 2 to 4.5%. In year 1 the interest rate was reduced to .05%. Reducing the interest rate encourages companies to invest and produce more (Foster, 2020). In year-2 the interest rate was also a low 1%. The tax rate for corporations was also reduced from 30% to 26% for the first 6 years. In both of these years, companies increased production and hired employees to meet the demand. In year-3 unemployment increased, as seen in the graph, from 4.5% to 4.9%. The interest rate had increased from 1% to 1.5% this year and all other variables remained constant. The Real GDP, shown above, was also constant at a 2.6% increase. This would show then that the increased interest rate increased the unemployment number for year-3. In year-4 unemployment declined from 4.9% to 4.7%. The interest rates increased from 1.5% to 2%, but GDP experienced a 3.1% growth. The increased consumption increased demand and the unemployment rate fell. In year-5 unemployment increased to 5.2%. All the decisions were maintained from year 4 except the government expenditures were increased at the same rate as the previous year. This resulted in a decline in GDP as seen in the graph above because expenditures did not increase at the same rate as consumption. As productivity decreased the unemployment number increased. In year-6 unemployment increased again to 5.3%. a factor that contributed to this increase was an income tax increase from 27% to 28%. This increase was to support more government expenditures but reduced the revenue available for consumption. As a result, domestic consumption increased at a lower percentage than the previous year impacting the GDP potential for the current year. The lower demand in production resulted in higher unemployment. In year-7 Econland achieved the best unemployment numbers at 4.3%. This was achieved by lower the interest rate from 2% to 1.5% and increasing the government expenditures by $5 million. This resulted in real GDP growth of 4.2%. As GDP increases and interest remains low, the unemployment numbers were at the lowest rates.

As I worked through the scenarios, I began to understand how the interest rates impacted GDP growth and helped control inflation. To increase the GDP I lowered the interest rate to .5% year 1. Lowering the interest rate encourages consumption as prices tend to fall and motivates companies to invest and produce more (Foster, 2020). The opposite is true when the interest rates rise. However, I discovered that it is important to raise interest to help reduce inflation. When economies consume more than the rate of production, this will increase inflation (Foster, 2020). Gradually adjusting the interest rates from .05% to 2% over the 7-year simulation helped lower the inflation rates but lowered the GDP and employment numbers in my simulation. The results of the declining inflation rate are apparent in the graph from year 1 to 7 as the interest rates were increased over the same period. However, it can also be noted in the graph that as interest rates increased the GDP decreased.

References

Foster, S. (2020, 11 3). Bankrate. Retrieved from 5 ways the Fed’s interest rate decisions impact you: https://www.bankrate.com/banking/federal-reserve/h…