Monetary And Fiscal Policy In Macropoland (Essay Sample)
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 a 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.
Develop a response that includes examples and evidence to support your ideas, and which clearly communicates the required message to your audience. Organize your response in a clear and logical manner as appropriate for the genre of writing. Use well-structured sentences, audience-appropriate language, and correct conventions of standard American English.source..
Monetary and Fiscal Policy
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Macropoland has been experiencing a recession which is an economic decline leading to a drop in income, GDP, retail sales, manufacturing, and employment. Our country's unemployment rate is high reading at 9%, consumer demand is low and this has been marked by sluggish consumption thus affecting investment negatively. Inflation has reduced to 0.4% which is way low than the 2% recommended for a stable economy. In order to stimulate economic growth in Macropoland, I recommend the use of expansionary monetary policy and expansionary fiscal policy tools to enable the economy to recover from the recession.
Expansionary monetary policy lowers bank interest rates and thus increasing demand. Expansionary fiscal policy, on the other hand, is a form of fiscal policy where the government increases the money supply by reducing taxes and increases its expenditure, this way, citizens have more money to spend and eventually boosting the economy.
Expansionary monetary policy will boost the economy of Macropoland in two ways, first, the central bank can buy treasury notes from its banks and replace it with credit. This allows the banks to lend at low rates to its clients, hence increase borrowing and this will boost the reduced investment and consumption demand. This is a technique that has been used by the U.S Federal Reserve to boost it's country's economy. With increased investment companies can hire more employees and raise their incomes, on that account the consumer demand increases since the employees can now afford more. The central bank through the treasury notes replacement reduces the interest rates of credit cards, ergo people can spend more consequently boosting the economy to about 2% to 3%.
Secondly, the funds rate
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