Question

Now that you have segmented the components on how fiscal and monetary policies can reduce recessionary and inflationary gaps, you must analyze how the consequences of the changes in fiscal and monetary policy instruments may be associated with the variations in the U.S. economic conditions. Provide examples based on your answers above to explain these consequences during a recession, and during inflationary times.

Answer 1

Through modifications in government spending and taxation, fiscal policy impacts aggregate demand. These variables affect jobs and family revenue, which then affect the expenditure and investment of consumers.
Monetary policy affects money supply in an economy that affects interest rates and the rate of inflation. It also affects company development, net exports, jobs, debt cost, and comparative cost of production versus savings — all of which affect overall demand directly or indirectly.

Through modifications in government spending and taxation, fiscal policy impacts aggregate demand. These variables affect jobs and family revenue, which then affect the expenditure and investment of consumers.
Monetary policy affects money supply in an economy that affects interest rates and the rate of inflation. It also affects company development, net exports, jobs, debt cost, and comparative cost of production versus savings — all of which affect overall demand directly or indirectly. Contractionary fiscal policy can be used to reduce government spending and sovereign debt or to correct out-of-control growth fueled by rapid inflation and asset bubbles

Expansionary monetary policy includes either purchasing Treasury bills, lowering interest rates on bank loans, or lowering the reserve requirement. All of these activities boost the supply of cash and result in reduced interest rates.

Contractionary monetary policy is implemented to stop extremely elevated levels of inflation or to normalize the impacts of expansionary policy. Strengthening the supply of cash discourages development of company and consumer spending and has a negative impact on exporters, which can decrease aggregate demand.

In maintaining economic and monetary stability, central banks play a vital role. To attain low and stable inflation, they perform monetary policy. Following the global financial crisis, key banks have extended their toolkits to address economic stability hazards and handle volatile currency exchange rates. To accomplish their goals, central banks need clear policy frameworks. Operational procedures adapted to the conditions of each country improve the efficiency of the policies of the central banks. By offering policy guidance and technical aid, the IMF promotes nations around the globe.