Assume the US has a GDP equal to $18.2 trillion. The GDP has been growing at 0.4

Question

Assume the US has a GDP equal to $18.2 trillion. The GDP has been growing at 0.4% for the last two years. Unemployment in the nation is at 7.8% which is up from 4.8% three years ago. Inflation has been falling for the last two years and now stands at 0.5%.

a. EXPLAIN IN DETAIL the problem(s) the nation is facing.

b. EXPLAIN IN DETAIL an active fiscal policy that could be used to solve the problem you identified in “a.” Be sure to include an explanation of the policy tools that should be used.

c. EXPLAIN IN DETAIL an active monetary policy that could be used to solve the problem you identified in “a.” Be sure to include an explanation of the policy tools that should be used.

d. Which of the two policies you recommended in “b” and “c” would you recommend? EXPLAIN IN DETAIL

Explanation / Answer

The growth rate of GDP is quite low even it is not equal to 1%.At this rate the investment will not led to capital deepening. Unemployment is quite high when natural rate of employment is expected to be just between 4%-5%.on the other hand inflation rate is tool low just 0.5% whereas the healthy rate that stimulates investment and economy should be around 2%.Given highemployment the economy can tolerate more inflation to reduce employment. Even the GDP of 18.2 trillion is quite low compared to the population of the country

The need of the hour is active monetary policy. Expansionary monetary policy will raise inflation and decrease unemployment according to Philips curve hypothesis. Such a measure will stimulate economy. There are various tools of monetary policy avaliable.e.g the Fed can lower federal funds rates which will reduce other interest rates charged by financial institutions. Such major will increase credit and money supply and stimulate investment. The fed can also lower required reserve ration which will lead to multiple expansion of credit. The fed can also use open market operation to purchase securities and pump money in the system. The fed can also publish economic information to educate people about economy and various measures taken by it to stimulate economy. The fed can also use moral suatiation to persuade banks to lend money. It can also reduce margin requirements and stimulate consumer credit.

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