Question

Economic Instruments: Please provide examples?

1. How do fiscal and monetary policies can reduce recessionary and inflationary gaps?

2. What are the consequences of changes in Fiscal Policy instruments during a recessionary period?

3. What are the consequences of changes in Monetary Policy instruments during a recessionary period?

4. What are the consequences of changes in Fiscal Policy instruments during an inflationary period?

5. What are the consequences of changes in Monetary Policy instruments during an inflationary period?

Answer 1

ans 1=

• An inflationary gap explains the difference between the prevailing level of real GDP & the anticipated Gross Domestic Product of an economy at full employment.
• Governments may choose to utilize fiscal policy to aid lessen an inflationary gap, often thru diminishing the number of monies circulating within the economy.
• Governmental fiscal policies which can diminish inflationary gap include reductions in governmental expenditure, tax escalations, securities & bond issues, interest rate augmentation, & transfer payment reductions.
• If an economy is in an inflationary gap, the central bank will adopt a contractionary monetary strategy to diminish the supply of money in the market by selling securities, increasing the reserve rate, or raising the discount rate.
• A recessionary gap is an economic terminology which explains an economy functioning at a level under its full-employment equilibrium.
• Such gaps close when actual wage rates return to equilibrium, where the amount of labor demanded is equivalent to the quantity supplied.
• Policymakers may choose to use a stabilization strategy to close the gap and raise actual GDP, called expansionary policy. The monetary authority may raise the amount of funds in circulation in the economy by lessening interest rates and raising governmental spending.