Question

Macropoland is currently experiencing a recession--consumption and investment are very sluggish, and unemployment is quite high at 9%. Currently, inflation is very low at 0.4% (the historical average rate of inflation is about 2%). The Macropolish President has just hired you as her economic advisor. Your job is to prescribe policy that would enable the economy to recover from the recession. Explain how you could use the standard tools of expansionary monetary policy and expansionary fiscal policy to stimulate this economy towards economic growth. Develop a response that includes examples and evidence to support your ideas, and which clearly communicates the required message to your audience. Organize your response in a clear and logical manner as appropriate for the genre of writing. Use well-structured sentences, audience-appropriate language, and correct conventions of standard American English.

Respond to the prompt with a five paragraph essay. The first sentence should be the statement of purpose. The first paragraph MUST include a strong thesis.

(Class is Principles of Macroeconomics)

Answer 1

To stimulate the economic growth during the recession using expansionary fiscal and monetary policy keeping Inflation, consumption & Investment (to be increased) and unemployment (to be decreased) into consideration.

As an economic advisor, I also need to consider above factors and ensure that every industries, sector, customers must be benefitted from the policies and there has to be an aggregate demand (not fluctuate) to do justice to Macropoland.

Hence, I will make the following policies

1. Expansionary Fiscal policy

2. Monetary Fiscal Policy

Expansionary Fiscal policy

During the downtime, Businesses would lose revenue and growth which will result in more layoffs of the employees resulting in more unemployment. At the same time, consumers would dramatically reduce their spending on unnecessary things and focus on need-based purchases. This will reduce the demand for the products and increased supply would result in reduced inflation.

To stimulate the aggregate demand, the famous Keynesian economist suggests about the expansionary fiscal policy. Wherein, I would do both decrease the tax rate of Macropoland and also, increase the government demand to achieve the aggregate demand.

The reduction in tax rate and more government spending would stimulate economic growth, lead to more money within the businesses causing more investments & employment from both the private and public sector. Also, it will gradually increase the demand within the customers which will increase consumption.

While, these strategies would, by and large, affect the government of Macropoland in the short run, it will help them in the long term overall growth and gives a multiplier effect.

For example- The government is losing money on tax cuts and increased spending. If the surplus amount of money from the tax cut is invested in a hotel by a businessman. It will create some employment and consumer spending. Also, more customers mean more vegetables & fruits which can be purchased from farmers resulting in increased agriculture. Similarly, the government’s spending on public transport or system would lead to an increase in employment.

The above stimulus would help the economy only to a certain extent and it requires further policies to decrease employment, increase the interest rate and consumption. That’s when monetary policies come into existence.

Monetary Policies

These kinds of policy is issued by central banks. I would reduce the interest rate and issue loans at discounted rates to the financial banks. At the same time, increase the asset prices of government bonds. It will significantly raise the loans to request from the banks/ financial institutions to be issue to consumers/ businesses as investors would no longer prefer expected government/ security bonds. Instead, they would want to risk more money into an investment and expected higher return.

When the demand for government bond decreases due to lower interest rates, the central bank would purchase those securities also known as quantitative easing which will create demand for existing govt. bonds with reduced interest rates and high-risk takers. For example, when the government bonds were less risky and gave a higher return. Investors preferred securities over any other investment during a recession. Hence, the central bank lowered the rates so that investors would get attracted to less interest rate, take a loan and invest into its business.