Question

Assume the GDP in the United States is at $20.5 billion dollars and has been growing at about 3% for the last 6 years. The unemployment rate is 4.0% and has been stable at that level for 7 months. The inflation rate is at 4.8% which is up from 2.5% two years ago. Economists at the Council of Economic Advisors estimate the NRU to be 4% and the target inflation to be 2.0%.

1. What problem(s) is the economy facing? Explain in detail using the data to support your explanation.

2. What would be an appropriate fiscal policy to deal with the problem you identified in Question 1? Explain the policy in detail and include an explanation of the tool(s) that should be used to address the problem.

3. What would be an appropriate monetary policy to deal with the problem you identified in Question 1? Explain the policy in detail and include an explanation of the tool that should be used to address the problem.

4. Which of the two policy options you identified in Questions 2 and 3 would be the more effective in dealing with the problem you identified in Question 1? Explain in detail.

Answer 1

1) economy is facing the problem of inflation which is set to be targeted at 2.0%

unemployment is same from few years and stable so we can say that this is the natural rate of unemployment in the economy

but as inflation rose up in last two years and now set to deduce so right now economy is facing the situation of inflation

2)through fiscal policy we have two major tools expenditure and recipts

public or development expenditture or we can say government spending is the one. by decreasing the public expenditure we can control the inflation as there will be less moeny supply in the market.

other one is increasing the taxation , as by increasing taxation there will be less disposable income left with the consumers thus controlling the inflation

3)through monetary policy we further have two type

either we can go for quantitaive measures or the qualitative measures

increasing the bank rates, increasing the CRR increasing the SLR ,increasing the margins of loans, sellling bonds in open market operations will decrease the money flow thus decresing the inflation

4) in dealing with the problem in long run fiscal poilcy is the best as monetary policy could make only the base but for long ru na ctual strength can be provided by fiscal policy to this problem.