GDP Effect of Fiscal and Monetary Policy a) GDP depends partly upon Investment a
ID: 1195927 • Letter: G
Question
GDP Effect of Fiscal and Monetary Policy a) GDP depends partly upon Investment and consumption spending. If the economy is in a persistent recession what can the Congress and Administration do to improve the GDP? b) What can the Federal Reserve do to improve the economy is Consumption and Investment depend partly on interest rates? c) As dictator of the U. S. economy what is your recommended course of action? Explain how your option works to improve the economy and take into account any secondary impacts.
Explanation / Answer
When the economy is in recession, then the country should go for expansionary fiscal and monetary policies. Both the policies should compliment each other instead of opposing. Congress should reduce the taxes and increase investments. This gives more disposable income in the pockets of consumers which will boost the domestic demand for goods and services. As the taxes decrease and more disposable income is there, firms will come forward to produce more, which in turn improves the employbility, which in turn increases the national income and the process repeats because its a vicious cycle.
As a Federal reserve, in order to compliment the efforts of government, it should reduce the cost of capital by reducing the base rates, reserve ratios and buying bonds. By reducing the interest rates, more money is available for supply in the economy and the investors come forward to build capital. This causes more investments, more jobs, more income and thus more demand.
As a dictator I would do the above mentioned things. But if the sentiment in the economy is not positive, then despite all these measures, people will still be reluctant in spending which adversely effects the aggregate demand. Rather, it would become fatal because with more money in circulation and a constant supply of goods, inflation spirals up and economy will face the heat. Hence, boosting the investor sentiment and market sentiment are the two things that have to be done along with the quantitative measures in order to bring the country out of recession.
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