Question

It is November 2008. You are an economist and a Member of the President’s Council of Economic Advisers, located in Washington DC. The US is in an escalating recession. Both the President and both the US House of Representatives and the US Senate have called upon you to draw up an urgent plan of action to reduce the massive contraction in the US economy.

It should have the following structure:

1. Very brief diagnosis, identifying key areas and sectors in trouble to be targeted.

2. List of Macroeconomic Variables to be targeted.

3. Recommended Fiscal Policy Instruments and Actions, expected results/rationale

4. Recommended Monetary Policy Instruments and Actions, expected results/rationale.

The President and the US Senate and the House of Representatives have specifically requested that you should not spend time describing the Great Recession and its causes. They know this all too well. Using the “ceteris paribus” ( = other things being equal approach) used by economists, you may assume that international force, political events and economic developments are currently being held constant.

Answer 1

1)

Economy is confronting compression need to work upon the each division of economy, total request or diminished utilization spending because of falling pay and deferment of utilization in future. aggregate supply or pile up of inventory on the part producer, unemployment, savings, investment, interest rate, all are the factor to consider foremost.

2)

Total request, total supply, general value level, venture and sparing joblessness, financing cost, flattening, cash supply and saving money, hypothesis of appropriation. Worldwide exchange and conversion scale and BOP and so on.

3)

Fiscal policy instrument are as follows

1. cut down the tax rate like direct tax ( income tax to increase the buying power of customer and indirect tax , it will increase disposable income, consumption and investment and Aggregate demand
2. Less borrowing from public and debt will be preferred.
3. deficit financing as new currency to stimulate the demand

4)

Monetary policy instrument will include qualitative and quantitative proportion

qualitative will includes

1. decrease in marginal requirement
2. moral suasion and selective credit control will follows cheap money policy to extend credit in selective areas and sectors.

quantitative will include

1. bank rate should decrease.
2. open market operation in which purchasing government security by central bank
3. CRR and SLR should be decrease.
4. reverse repo rate should be decrease to increase the money supply by bank