l investments by performing two things: cutting taxes levied on households and firms, thus increasing disposable income, the money that consumers can spend on goods and services and increasing the incentives of creating new businesses; or it may itself spend more to increase the level of demand. Since a fiscal stimulus translates to an increase in government purchases, our focus is on the latter policy.
Now consider an increase in government purchases: An increase in government purchases increases planned expenditure, which then in turn stimulates the production of goods and services and thus increases income. In a pragmatist fashion, when the government spends to create livelihood projects, the number of jobs increases and so does the production of goods and services. This however has ramifications because as people have more income, their demand for products increase, thus they would want to spend more and save less. This in turn increases the interest rate to give people more incentive to save in banks. However, this interest rate however is the same interest rate that firms consider before borrowing money from the bank and investing in a business venture. And this is where the trade-off stems from because the higher the interest rate, the less likely firms will build new businesses and contribute to the increase in output of goods and services and, of course, to economic output or income. Hence, just by simple deduction, a fiscal stimulus really swings both ways in affecting our gross domestic product.
To put things in perspective, according to the United States Department of Labor, Bureau of Labor and Statistics, the unemployment rate decreased from 10.2 percent last October to 10.00 percent this November. Productivity increased from 6.9 percent during the 2nd quarter of 2009, to 8.1 percent during the 3rd quarter of the same year. Also, the U.S. Bureau of Labor and Statistics also reports a projection of total employment to increase by 15.3 million, or 10.1 ...
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