Question

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.

Answer 1

Theory:

During an inflationary level, govt. can adopt contractionary fiscal policy(Raising tax rates and decreasing govt. spending) and central bank can have contractionary monetary policy ( raising interest rates and lowering money supply ).

During an deflationary level, govt. can adopt expansionary fiscal policy(lowering tax rates and increasing govt. spending) and central bank can have expansionary monetary policy ( lowering interest rates and increasing money supply.

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

Answer : When there are less policy conflicts and also when economy is stuck in a certain gap(inflationary/deflationary). When economy cannot correct itself due to many reasons like global recession. Liquidity crisis ar any other macroeconomic mismanagement.

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

When economy can self correct it and problems are temporary in nature and are not harming economy deeply. It may also be when the crowding out effect is likely to drive out private investment which could have been efficient and effective.

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

As explained above, expansionary fiscal policy which decreases taxes and increases govt. spending in an economy. This will shift aggregate demand to right and real GDP increases also making per capita GDP to increase.

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

As explained above, expansionary monetary policy which decreases interest rates and and increases money supply in an economy. This will shift aggregate demand to right and real GDP increases also making per capita GDP to increase.

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

In my opinion. they should be used as historical evidences prove so. 1929 great depression. 2008 recession had effective policy implementation to bring economies out of recessions. However, economists like monetarists argue that it is due to these deliberate policies the recessions come.