Question

During a recession, what specific actions in fiscal policy will the government do to help the economy? What specific actions in monetary policy will the Fed do to help the economy?

During an inflationary period and heated economy, what specific actions in fiscal policy and monetary policy will be expected?

Answer 1

Recession

At the times of recession there is low growth, lower output levels and decrease in aggregate demand in the economy. So to boost the economy and stabilize the fluctuations fiscal and monetary policies are used.

In recession, government uses expansionary fiscal policy in which it reduces taxes and increases government spending due to which consumption level and aggregate demand in the economy increases. Federal uses the monetary policy by reducing the interest rates so to boost the economy by increasing the level of investments.

Inflation

During inflationary period, there is overall increase in the price level of the economy. This happens when people hold a lot of money and their purchasing power increases. They are willing to pay higher prices for the goods.

During inflation, monetary and fiscal policies are used to reduce the excess money in the hands of people, reduce their purchasing power and thus reduce the overall increase in the price level of the economy.

Government uses contractionary fiscal policy in which it increases taxes and reduces its spending in the economy due to which people will be left with lesser money with them. Federal uses the monetary policy by increasing the interest rates so that there are lower borrowings from them. Thus decreasing the excess money supply in the economy which was the cause of inflation.