Question

1. (1 point) Choose a policy solution among:

• classical approach of self regulation
• Keynesian demand side approach of fiscal policy
• Keynesian demand side approach of monetary policy
• Supply side approach of fiscal policy

2. (1 point) Explain how you would implement the above chosen policy solution. Give a specific policy tool, based on the above chosen policy solution.

3. (1 point) Why did you choose this policy solution? Contrast your policy choice with another one.

4. (1 point) What desired outcomes will result on the US economy as a consequence of this policy implementation? Also discuss a criticism about this policy.

Answer 1

Answer 1:

Given the current situation of the US economy, the policy solution chosen is Keynesian demand side approach of fiscal policy.

Answer 2:

This can be implemented using expansionary fiscal policy to eliminate recessionary gap in the economy. The policy can be implemented by increasing government expenditure and reducing tax rate in the economy.

Answer 3:

This policy solution is chosen but it has the largest multiplier impact on the economy. Classical approach of self regulation will not work in this case because it takes long time and economy cannot remain in recession for such a long time. Keynesian demand side approach of monetary policy depends on various parameters like commercial banks transmission mechanism, interest rate sensitivity of investment demand and thus does no direclty impact aggregate demand. The supply side approach is a long term measure and not a short term solution. Thus, in this scenario the best for the economy is to follow expansionary fiscal policy.

Answer 4:

This policy will increase the level of aggregate demand in the economy leading to increase in the level of Real GDP and decrease in unemployment rate in the economy. One drawback of this policy is increase in inflation rate and increase in budget deficit.