Assume that the country is in a period of high unemployment, interest rates are

Question

Assume that the country is in a period of high unemployment, interest rates are at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year. Suggest how fiscal and monetary policy can move those numbers to an acceptable level keeping inflation the same. What is the first action you would take as the president? As the chairman of the Fed? Why? What would be your subsequent steps? Make sure you include both the positive and negative effects of your actions making sure you include the trade-offs or opportunity costs.

Explanation / Answer

In regard to monetary policy I would do the following. As the chairman of the Fed I would lower the overnight interbank rate (fed funds rate) to increase access to capital for the retail banking sector. This will allow individuals and business a chance to obtain the capital they need to spend and to search for jobs and start their own ventures/corporations. The positive affects will be an increase in consumer confidence, reserve requirements, and in saving, investment, and consumption in the short run. The tradeoff with this move is that this mill increase the money supply and subsequently decrease the value of the U.S. Dollar. In this scenario, interest rates are already zero so lowering them any more is not an option. Regarding fiscal policy, as the president I will be working with members of the legislative and my executive branch to cut taxes and implement spending increases. The president can promote social programs, government purchases in the private sector and push for economic incentives for industries that have high potential for growth. These policies will be effective in the short run in increase the wealth (income) of citizens through the tax cuts and the various opportunities offered. The negative effects are the chance that these programs will not be useful and be considered wasteful spending. Tax cuts and unnecessary government spending could have a negative on the Budget deficit. The U.S. has had issues with balancing the balance from a deficit into a surplus and policy should be implemented with caution.

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