Macropoland is currently experiencing a recession--consumption and investment ar

Question

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 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. Write a coherent essay, including an introductory paragraph with thesis statement, supporting paragraphs with main statements, transitioning between paragraphs, and a conclusion paragraph. Be sure to answer the writing prompt clearly and directly. Otherwise, your assignment will be given a grade of zero (0) for being off-topic. Use vocabulary words from your textbook to show your mastery of the economic concepts in your essay. Elaborate your main points.

Explanation / Answer

Since the economy is in doldrums, a policy mix of both expansionary monetary policy and expansionary fiscal policy is needed to increase the overall level of the aggregate demand in the economy. Considering the role of government in this scenario, expansionary fiscal policy should include increasing government spending and reducing the tax rate in the economy. This will stimulate consumption levels and increase the equilibrium national income. This in turn will also raise production and reduce unemployment as the firms will hire more workers to produce output. The overall price level will rise on the economy due to rise in aggregate demand.

On the other hand, Fed should lower interest rate through open market purchase of the government securities. This will increase money supply in the economy and lower the rate of interest. The reduced interest rate along with rising aggregate demand ad mentioned in above paragraph will lead to rise in investment as the business sentiment will turn optimistic amount future expectations of the sale of their product. Thus, overall national income will rise in the economy.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.