In sum, the U.S. government pursued an expansionary fiscal policy during the Great Recession and a counterintuitive contractionary policy in the recovery that has followed. If matters continue that way, fiscal policy may lose its utility as a means of sparking economic growth.

During a recession, the government may employ expansionary fiscal policy by lowering tax rates to increase aggregate demand and fuel economic growth. In the face of mounting inflation and other expansionary symptoms, a government may pursue contractionary fiscal policy.

One popular method of controlling inflation is through a contractionary monetary policy. The goal of a contractionary policy is to reduce the money supply within an economy by decreasing bond prices and increasing interest rates.

The goal of expansionary fiscal policy is to reduce unemployment. Therefore the tools would be an increase in government spending and/or a decrease in taxes. This would shift the AD curve to the right increasing real GDP and decreasing unemployment, but it may also cause some inflation.

Four strategies to overcome employment are as follows:

• Education and training.
• Reduce the control and power of the trade union.
• Employment subsidies.
• Improve the “labour market” flexibility.

An expansionary (or loose) monetary policy raises the quantity of money and credit above what it otherwise would have been and reduces interest rates, boosting aggregate demand, and thus countering recession.

Which kind of monetary policy would you expect in response to recession: expansionary or contractionary? Why? Expansionary policy because it can help the economy return to potential GDP.

What is the difference between a tight and a loose monetary policy? In a tight monetary policy, the Fed’s actions reduce the money supply, and in a loose monetary policy, the Fed’s actions increase the money supply.

Expansionary fiscal policy is most appropriate when an economy is in recession and producing below its potential GDP. Contractionary fiscal policy decreases the level of aggregate demand, either through cuts in government spending or increases in taxes.

Which is a limitation of monetary policy in stabilizing the economy? Monetary policy is subject to uncertain lags. If the Federal Reserve wishes to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be: an increase in money supply growth.

The output of an economy usually increases over time. While there is no single definition of recession, it is generally agreed that a recession occurs when there is a period of reduced output and a significant increase in the unemployment rate. Views differ about how to best identify this.

Congress has delegated responsibility for monetary policy to the Federal Reserve (the Fed), the nation’s central bank, but retains oversight responsibilities for ensuring that the Fed is adhering to its statutory mandate of “maximum employment, stable prices, and moderate long-term interest rates.” To meet its price …

The Fed has traditionally used three tools to conduct monetary policy: reserve requirements, the discount rate, and open market operations.

Monetary policy can be broadly classified as either expansionary or contractionary. Tools include open market operations, direct lending to banks, bank reserve requirements, unconventional emergency lending programs, and managing market expectations—subject to the central bank’s credibility.

Monetary policy has two basic goals: to promote “maximum” sustainable output and employment and to promote “stable” prices. These goals are prescribed in a 1977 amendment to the Federal Reserve Act.

The Federal Reserve works to promote a strong U.S. economy. Specifically, the Congress has assigned the Fed to conduct the nation’s monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates.

Some monetary policy examples include buying or selling government securities through open market operations, changing the discount rate offered to member banks or altering the reserve requirement of how much money banks must have on hand that’s not already spoken for through loans.

Central banks use monetary policy to manage the supply of money in a country’s economy. With monetary policy, a central bank increases or decreases the amount of currency and credit in circulation, in a continuing effort to keep inflation, growth and employment on track.

Contractionary policy is a monetary measure referring either to a reduction in government spending—particularly deficit spending—or a reduction in the rate of monetary expansion by a central bank. Contractionary policy is the polar opposite of expansionary policy.

Monetary Policy Tools and How They Work

• Reserve Requirement.
• Open Market Operations.
• Discount Rate.
• Interest Rate on Excess Reserves.
• How These Tools Work.
• Other Tools.

Central banks use several methods, called monetary policy, to increase or decrease the amount of money in the economy. The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money.

spending

An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending. Opposite effects occur when the supply of money falls or when its rate of growth declines.

decrease their interest rates to encourage borrowing. increases investment and consumer spending which increases AD – this would be a policy that would be used to fight a recession. rate of interest on loans to banks from the Fed. this should pull the economy out of the recession.

Monetary policy can offset a downturn because lower interest rates reduce consumers’ cost of borrowing to buy big-ticket items such as cars or houses. For firms, monetary policy can also reduce the cost of investment.

Unconventional Monetary Policy Tools The problem with conventional monetary tools in periods of deep recession or economic crisis is that they become limited in their usefulness. Nominal interest rates are effectively bound by zero and bank reserve requirements cannot be made so low that those banks risk default.

What would be reasonable monetary policy during a period of high inflation? reduce the money supply. put downward pressure on prices as investment and spending slows.

Con: Increases Unemployment Increased unemployment results from the slowing production and increasing interest rates. As companies slow their growth rates, they hire fewer employees. Increases in unemployment reduces the demand for many products and services, making the economic contraction more severe.

The occupation that would be least affected by inflation would be a doctor in private practice. Inflation is defined as a rise in the general level of prices.

In other words, inflation was running rampant, usually thought to be the result of the oil crisis of that era, government overspending, and the self-fulfilling prophecy of higher prices leading to higher wages leading to higher prices. The Fed was resolved to stop inflation.