Eric Gray

Prof. K. MacNamara

ECON 2020

May 2, 2017
The Plans of Donald Trump

The American economy is still recovering from the most recent recession. Between 2006-

2010, the economy went through a decline in real estate, known as the housing crisis. Since then,

real GDP has increased roughly about 15.5% over the past seven years (Levine-Weinberg). This

is about twice as slow as it has been in past recessions. Donald Trump, or now known as

President Donald Trump, has introduced big plans for the United States economy. Two of the

major things he wants to implement is to increase government spending on infrastructure

projects, reduce taxes, and hopeful that it will influence interest rates throughout the process.

This is an attempt to boost real GDP through fiscal and monetary policy.

First, the initial proposal that Trump has asked for the infrastructure project is one trillion

dollars (Merica). This will be funded publicly as well as privately. The idea here is increasing

government spending, especially in the vast amount like here, will grow the economy. This will

create a great deal of jobs. Thus, giving people more income to spend and save, having a higher

consumption. This will indirectly raise aggregate demand. By doing this, the economy is bound

to grow and increase employment, which will expand the economy. This is an example of

expansionary fiscal policy.

Second, Trump would like to reduce taxes. A quick outline of his plan is to have the

lower and middle class have more money in their pockets and take less taxes, change the tax

code from seven to four, and reduce the loopholes for the very rich. Cutting taxes gives people a
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higher disposable income. With this, each person can either spend their excess money or save it.

Either way, they are contributing to GDP. This is also an example of expansionary fiscal policy.

By cutting taxes and increasing government spending is an attempt to increase real GDP.

The relationship is simple. Reducing taxes gives people more money to spend and save.

Increasing government spending creates employment. Each plays a role in boosting GDP.

Trumps plan, in theory, will benefit the economy. If, of course, the funding stays true and he can

gather the one trillion dollars to begin such an economic move.

As I briefly mentioned, cutting taxes gives a higher disposable income and gives people

the chance to save money. This is where the Fed comes into play. The Fed can change interest

rates as they see fit. As of 2007, the interest rates are at a historically low point (Lam). This has

been in place to try and stimulate the economy. It is trying to boost consumption by having

people borrow money, practically for free, and then spend that money. But now, almost a decade

later, Trump is trying to create jobs and grant people more money in their pockets. If this goes as

projected, the Fed should feel obliged to raise the interest rates. With more money in circulation

from Trumps plans, the Fed should take the opportunity to increase the money supply.

The Fed does not need to print more money to increase the money supply. The Fed can

do this through the money multiplier. To explain this as simply as possible, the money multiplier

is where banks use the reserves from deposits they have received and lend that money back out.

They keep a small amount of the deposit, for example like 10% of the original deposit, and lend

the rest out. This causes the money to multiply and put more money into circulation. The Fed can

do this by raising the interest rates. This will entice people to save more money. The more people

save, the more money gets multiplied. Effecting the money supply is monetary policy.
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The Fed uses interest rates based off what it foresees the economy doing. The housing

crisis had the Fed lowering interest. Inflation causes the Fed to raise the interest rate. The

relationship between the Fed with the interest rates and the economy is completely dependable

on where the economy is going. If the Fed needs more spending in the economy, they lower

interest rates. If prices get too high, they raise interest rates to indirectly effect prices.

Continuing, inflation, which is an increase in pricing and a decrease in purchasing power,

right now is at about 1.8% (Amadeo). This is the rate that general prices for products and

services rise. This is just slightly below the target rate of 2.0%. The target rate is considered to be

the rate at which prices are consistent over the long run with employment. Over the course of

Trumps presidency, some, such as Jeff Gundlach of Doubleline Capital, believe that inflation

can get to as high as 6%. Others believe inflation will rise as well, just not as significantly. Both

indicating that prices will jump throughout Trumps presidency.

Overall, President Trumps new policies should positively impact the economy. Gathering

one trillion dollars for infrastructure projects will not be easy, however if successful, will

stimulate the economy greatly. Cutting taxes will help individual households. They will have

more disposable income and will increase consumption. Although, this will reduce tax revenues

for government spending. With these two main ideas in place, the Fed should increase interest

rates. This will induce more saving and multiply the money being deposited. Lastly, experts

believe that Trump will in fact cause inflation at a high level. Economically, Trump can make the

first major move in restoring the economy. This should be the next step in getting out of the

recession.
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Works Cited

Granville, Binyamin Appelbaum and Kevin. "Why the Fed Is About to Raise Interest Rates."

The New York Times. The New York Times, 18 Sept. 2016. Web. 05 May 2017.

Lam, Bourree. "The Fed Raises Interest Rates." The Atlantic. Atlantic Media Company, 15 Mar.

2017. Web. 05 May 2017.

Merica, Dan. "Trump: I will ask Congress for a $1 trillion infrastructure bill." CNN. Cable News

Network, 28 Feb. 2017. Web. 05 May 2017.

And that could mean higher inflation is on the way -- thanks to stimulus proposed President-elect

Donald Trump, and A Likely Rate Hike from the Federal Reserve. "Inflation could return

under Donald Trump." CNNMoney. Cable News Network, n.d. Web. 05 May 2017.
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Reflection

This paper was actually relatively tough to write. I understand the concepts, or I feel as if

I understand the concepts well, but putting them down that makes sense to someone else is hard.

The way I understand it in my head and the way I can explain with examples and things, I

couldnt really do that here. I had to use more like textbook understandings and I think that is

why it was tough to write. Not to mention, I did not really know a lot about Trumps policies

aside what was discussed in class, so that was also a factor. Trying to write this paper did further

help me understand concepts. Explaining them out, trying to be concise really cleared things up.

There was a lot of information for 3 pages, yes I know I could go over, but without just rambling

on and trying to get the points across was tough. Using a real world scenario, not just graphs in

class, and having to define them all on my own, really helped understand concepts.