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As you have learned in Unit 8 (this week), monetary and fiscal policy play important roles in economic stimulation and or stabilization. In this regard:

 

a. When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy? 

b. When is it inappropriate to use monetary and fiscal policy to stimulate or stabilize the economy?

c. What specific fiscal policy tools would you use to stimulate aggregate demand and how?

d. What specific monetary policy tools would you use to stimulate aggregate demand and how?

e. What is your conclusion, should policymakers use the monetary and or fiscal policy to stimulate aggregate demand? Explain briefly.

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Related questions

In an effort to move the economy out of a recession, the federal government would engage in expansionary economic policies. Respond to the following points in your paper on the actions the government would take to address expansionary fiscal and monetary policies:

Expansionary Fiscal Policy:

Explain the actions the federal government would take while engaging in expansionary fiscal policy in terms of the following:

The necessary change in taxes and government spending,

The effect on aggregate demand, GDP, and employment.

Expansionary Monetary Policy:

The three tools the Federal Reserve Bank (The Fed) uses when conducting monetary policy are the required reserve ratio, the discount rate, and open market operations.

Explain the actions of the Fed in regard to the three tools.

When the required reserve ratio is increased or decreased

When the discount rate is increased or decreased

Buying or selling government securities when conducting expansionary monetary policy

Explain how these actions would affect the money supply, interest rates, spending, aggregate demand, GDP, and employment.

3. Please list the 4 key supply side growth factors we discussed, and discuss their viability in terms of getting our economy growing again, given that today our economy is not growing.

a. The slides should provide you with what you need here.

b. The issue of viability – if the economy is growing slowly or not at all, do we have any chance of achieving success with each of the 4 growth factors? What will likely cause us problems? What approaches could we use to increase our odds of success? You need to think carefully on this one.

4. Creative problem solving

Scenario #1:

The rate of growth in the US economy is currently 0.5% annually. Your mission is to increase our growth rate to at least 4% annually, without setting off unacceptable levels of inflation. You have the tools of fiscal and monetary policy available.

a. Present your solution to the problem – write it down first.

i. Strategy for creating your solution:

1. First identify a specific natural resource and think through how having more of it or a better quality of it could lead to significantly increasing the GDP growth rate.

2. This will lead you to a general solution to the problem.

3. Write it down! The explanation of the solution should take at least one good paragraph!

4. Determine what will be required to make the solution happen, typically it is money.

5. Think of ways to use your fiscal and monetary policy tools to get the needed money.

6. To attack the problem you must select at least one Monetary Policy tool and one Fiscal Policy tool.

b. Write down the names of the one fiscal policy tool and the one monetary policy tools you picked.

i. Remember – for this question you need one Fiscal Policy tool and one Monetary Policy tool.

c. Explain why you picked the tools that you picked and why you did not select the other choices.

i. Specifically explain what is good about the tool you selected and what is not so good about the tools

you did not select? Do this for

both the monetary and fiscal policy tool that you selected. The key here is to use some decision criteria in making your choice.

d.,Thoroughly and completely explain how your solution would work to solve the problem. You must include and explain the use of your monetary and fiscal policy tools and indicate the impact your solution would have on the key economic variables. Please present your answer using a chain of events format. Be specific. I need to see the detail.

 Macroeconomics: Events and Ideas

a) The economy is under inflationary pressure. The head of the President's Council of Economic Advisers is a staunch Keynesian. Will this Keynesian recommend or not recommend? Explain.

b) Prior to the 1930s, classical economics was the predominant theory about the behavior of the aggregate price level, aggregate output, and the appropriate role of monetary policy. Describe how classical economists believed the economy would be affected by an increase in the money supply.

c) Explain the rational expectations theory and how it predicts the usefulness of fiscal and monetary policy.

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