Question

1. Which stabilization policy, fiscal or monetary, was responsible for stabilizing the U.S. economy during the Great Recession? Explain.

2.Discuss any limitations of using fiscal or monetary policy to help stabilize the economy.

Answer 1

1. Monetary policy was responsible for stabilizing the U.S.economy during the Great Recession.

There are three policy levels that can be used to stabilize an economy that has suffered such a shock aggregate demand.

1. Exchange rate policy,

2. Fiscal policy and

3.Monetary policy.

As with fiscal and exchange -rate policies the goal formonetary policy makers is to stabilize economic activity after a negative shock to aggregate demand by providing a countervailing positive spur to demand with the levers have available to them. The primary lever the federal reserve has available to them is control over short -term interest rate.

2. Limitation of using fiscal policy to help stabilize the economy.

Government taxing and spending -almost always is controversial. While the government has a role in promoting economic growth full employment and price stability, its methods for doing so frequently are subject to contentious debate whichever side prevails at the moment it must deal with limitations posed by the process and past application of fiscal policy.