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 adviser. 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.

Answer 1

The different proposals that can be given are as per the following -

Monetary policy measures:

a) Decrease in CRR and the SLR will prompt more excess reserves subsequently the lending capacity of banks will expand, prompting the greater investment.

b) Fed should buy the government securities  from the open market so as to inject the money into the economy.

c) Fed should bring down the discount rates so that banks can borrow from fed and could lend more so as to increase the demand in economy.

Fiscal policy measures:

a) The government should reduce taxes so that public has more money to spend .

b) Deficiency financing can likewise be a method to increment the rate of inflation and reaching the objective.