Question

2. Addressing recession using Fiscal and Monetary Policy tools. Scenario - The US economy is currently experiencing recession. You have Fiscal and Monetary policy tools available to address this problem:

a. To attack the problem of recession, you must select at least one Monetary Policy tool and one Fiscal Policy tool. Write down the name of your Fiscal Policy tool and your Monetary Policy tool. i. Think the options through and write down your choices.

b. Please explain why you selected the tools that you selected and why you did not select the other choices? Do this for both monetary and fiscal policy tools! i. Specifically, explain what is so good about the tool you selected and what is not so good about the tools you did not select? Do this for both the Monetary Policy tool and the Fiscal Policy tool. The key here is to use some decision criteria in making your choice.

c. Thoroughly and completely explain how your solution (both monetary and fiscal policy tools) would work to solve the problem of recession, and indicate the impact your solution would have on the key economic variables. Be specific. i. Present this using the chain of events format with up or down arrows to indicate the direction of impact on each variable. I need to see the detail.

Please answer all question with complete details.

Thanks :)

Answer 1

a)

• Monetary policy and fiscal policy are used to deal with recession. Demand falls during the recession, thus extra demand in market is infused through the monetary and fiscal policies.
• Monetary policy tool: reduction federal Fund rate, Fiscal policy tool: Increase in government expenditure.

b)

• Monetary Policy tool: Federal fund rate is preferred over the open market operation. Federal fund rate has relatively larger impact and it is relatively easy to execute and produces impact hurriedly.
• Fiscal policy tool: multiplier value in case of public expenditure is greater than in case of reduction in taxes. Thus, public expenditure must be preferred over the taxes.

c.

• Monetary Policy process: Fall in federal fund rate – rise in availability of money supply – fall in interest rate – rise investment – more economic activities and rise in GDP and employment opportunities.
• Fiscal Policy: rise in public expenditure –rise in aggregate effective demand – more investment and economic activities – rise in GDP- Rise in employments.