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.

I need a lot of detail please.

Answer 1

Ans

I will use discount rate, open market operations and required reserve ratio as part of monetary policy. I will decrease discount rate. The banks can then borrow loans at cheap rates from fed. They will thus in turn decrease their lending rates. People who want to invest can then purchase loans at less cost. So they will invest more. This will increase demand and economy will grow fast reducing unemployment and raising inflation rate

The fed can also purchase securities through open market operations In this way banks will receive more deposits and money. This will decrease interest rate ans loans will be cheap.

The fed can also lower required reserve ratio. The banks will then have to keep less percentage of deposits as reserves. Thus money multiplier which is 1/required reserve ratio will increase. The credit creation will increase and loans will become cheap So investment will once again rise

As far as fiscal policy is concerned the Govt will increase expenditure This will raise aggregate demand and growth. Unemployment will fall and inflation will rise. Tax cut will also achieve the same.