Fiscal Policy is defined as the deliberate change in either government spending or taxes to stimulate or slow down the economy (Colander, 2004). The effects of the changes in fiscal policy in the simulation had an effect on government expenditure and taxes. Making the right decisions about government expenditure and taxation will help the economy achieve the desired potential output in the long run. In the first scenario, as President I had to decide what would be the best way to fight off a recession without increasing the budget deficit higher than 5% of the gross domestic product (GDP). I had to decide on three alternatives which were, change in government spending on infrastructure, education, or income tax rates. I chose to increase the spending on infrastructure by 300 million. Increasing this policy led to increase in real GDP by 41.20 billion and therefore to an increase in real income and a fall in unemployment. Unfortunately, my decisions did raise inflation a little by 5%. On the other hand it helped increase my popularity as President. When the economy is in recession the best decision is to raise expenditure or taxation or both. If expenditure is not increased then the economy's developmental needs will not be satisfied. Increasing the expenditure was better than investing in education because developing infrastructure to connect different parts of the economy is crucial to the country. Investing in education would not have helped because it still would not generate enough jobs in the small town of Erewhon. The majority of the people skills are in agriculture.
The next scenario involved a decision to decrease inflation which meant a decrease in the people incomes as well. Again I had to choose between governmen ...