Macroeconomics in This Case, There Are a

Macroeconomics In this case, there are a number of monetary policy prescriptions that apply, all of them expansionary. In terms of open market operations, the Fed should buy Treasuries. This will pump money into the banking system, providing greater means for investment. This will provide the groundwork for economic growth, in particular it will signal that the Federal Reserve is committed to restoring economic growth and halting the growth in unemployment. This policy should improve national income.

As investors are not investing, however, this strategy is unlikely to succeed on its own. The Federal Reserve should lower interest rates as well. Investors may be convinced to invest is the risks associated with investment are reduced, and this means reducing the cost of money. This strategy will not inject more money into the banking system, but will encourage investors and consumers to spend more money, increasing liquidity in the system. The national income again should rise as the result of this policy.

In each situation, the move is desirable because the economy is slowing down and expansionary policy is needed to restore growth. One automatic stabilizer that can prevent the economy from moving too quickly is federal expenditures. The stabilizer can work in this case by increasing government spending in order to diminish the effects of the downturn in private spending and consumer demand. Conversely should the economy heat up, federal spending can be reduced in order to partially cool down the economy. 2.

The type of gap that the economy is currently facing is a recessionary gap, characterized by unemployment far above the natural rate, output below capacity and downward pressure on prices. In this case, the desired fiscal policy is to increase spending. This will help to improve capacity utilization, which should also lower unemployment. With enough fiscal stimulus, inflation may increase as well. To complement this fiscal policy, the Federal Reserve should implement expansionary monetary policy. In particular, open market operations are the most appropriate policy for dealing with this situation.

They inject money into the economy, creating conditions for investment. However, the persistent low inflation is also cause for concern. The combined fiscal stimulus and open market operations should increase the inflation rate by not only improving the economy but also by signaling to the market that the Fed intends to create inflationary conditions to give the economy more traction for growth. In this situation, I would have a preference for fiscal policy. Monetary policy may not succeed because firms are well below capacity.

There is little incentive for them to invest if they have that much excess capacity. Thus, while monetary policy would create the conditions for economic growth, it does not guarantee that actual growth will occur. With fiscal policy, it is guaranteed that the money will be spent and added to the economy. 3. The type of gap that this economy is facing is an inflationary gap, characterized by high employment, high inflation, full capacity and high GDP growth. In this case, contractionary fiscal policy is recommended.

This will have the impact of bringing capacity utilization back down in certain key sectors, hopefully having a cooling effect on the economy. Reduced demand should lower inflation somewhat under these conditions. The Federal Reserve could raise the discount rate in order to influence the economy in this situation. Raising the interest rate would discourage investment. As.