Unit 6 Application Name(s):Fiscal and Monetary Policy The President of the Unite
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Question
Unit 6 Application Name(s):Fiscal and Monetary Policy
The President of the United States has asked you to make fiscal and monetary policy recommendations using the options listed below. The objective will always be to return the economy to long run equilibrium with minimal changes to the price level in the economy.
Fiscal Policy
? Decrease Government Spending? Increase Government Spending ? Decrease in Taxes
? Increase in Taxes
Monetary Policy
? Increase in Money Supply ? Decrease in Money Supply
* Be aware that if your policy decisions cause the price level of the economy to rise, input prices will rise. It is also true that if the price level of economy falls, input prices will fall.
Be prepared to answer the following questions:
1.) Which policy decisions will cause the government to operate using a budget deficit?
a.) If government is running a budget deficit they will have to borrow money through the sale of bonds. What will be the resulting impact on interest rates in the economy?
2.) Which policy decisions will result in a potential government budget surplus?
a.) If government is experiencing a budget surplus they will not have to borrow money and thus sell fewer bonds. What will be the resulting impact on interest rates in the economy?
3.) Explain the impact that monetary policy will have on interest rates in the economy.
Unit 6 Application ECON 2210
4.) If you predict interest rates will rise in the economy, what will be the resulting impact on our domestic currency? Will it appreciate or depreciate?
5.) If you predict interest rates will fall in the economy, what will be the resulting impact on our domestic currency? Will it appreciate or depreciate?
Scenario One
The economy is experiencing a severe recessionary gap. The President of the United States has asked you to make fiscal and monetary policy recommendations using the options listed below.
Fiscal Policy
? Decrease Government Spending? Increase Government Spending ? Decrease in Taxes
? Increase in Taxes
Set the Excel model to the following settings:
Monetary Policy
? Increase in Money Supply ? Decrease in Money Supply
5.) Explain which fiscal and monetary policies you would select to return the economy to long run equilibrium. Also explain if your decisions resulted in any inflation or changes to the government budget.
Unit 6 Application ECON 2210Scenario Two
The economy is experiencing an inflationary gap. The President of the United States has asked you to make fiscal and monetary policy recommendations using the options listed below.
Fiscal Policy
? Decrease Government Spending? Increase Government Spending ? Decrease in Taxes
? Increase in Taxes
Set the Excel model to the following settings:
Monetary Policy
? Increase in Money Supply ? Decrease in Money Supply
6.) Explain which fiscal and monetary policies you would select to return the economy to long run equilibrium. Also explain if your decisions resulted in any inflation or changes to the government budget.
*Hint: If interest rates do change, check the appropriate box in the Macroeconomic Outcomes:
Explanation / Answer
1)
Under Fiscal conditions, if the following decisions are made then, the govt will have to run operate using a budget deficit
Budget Deficit means Govt revenue < Govt expenditure
-> Increase in govt spending will increase govt expenditure
-> Increase in Taxes will increase govt expenditure
-> Increase in money supply means an increase in govt spending which means an increase in govt expenditure
a) Borrow money through the sale of bonds. This is a contractionary monetary policy where the liquidity in the economy is les. This will reduce the inflation of the economy and increase the interest rate.
2)
Government Budget Surplus
When the government revenue is greater than the expenditure. This can be achieved by:
-> Increasing the tax
-> Decreasing govt spending
-> Decrease the money supply in the economy in the form of increasing the lending rates...
a) If the govt is running in budget surplus, it means there is liquidity in the economy. Growth and inflation is increasing in the usual rate. This will reduce the interest rate.
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