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WEEK 6: MONETARY POLICY AND FISCAL POLICY A healthy economy typically has low rates of unemployment...

WEEK 6: MONETARY POLICY AND FISCAL POLICY

A healthy economy typically has low rates of unemployment and steady prices. Low rates of unemployment means that the economy is operating at its full potential. To ensure the economy continues to operate at potential GDP (full capacity where all savings are invested in production functions, and where all those who wish to work can find a job, and all other factors of production are fully utilized in the production function), governments use fiscal and monetary policies to lower unemployment rates and to control prices (inflation).

For your initial post, answer one of the following questions.

  1. Discuss the primary goals of expansionary and contractionary fiscal policies and their effects on unemployment rates, inflation rates, interest rates, private investment, and GDP.
  2. Discuss the goals of expansionary and contractionary monetary policies used by the Federal Reserve Bank and the approaches (called monetary policy tools) used to achieve each policy. Also, discuss the effect of each policy on GDP, price level, private investment (investment in capital acquisition by firms and housing by households), and net trade.
  3. In your opinion, which policy is more effective—monetary policy or fiscal policy? Why?
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Answer #1

Purpose of expansionary fiscal policy

This type of fiscal policy helps to the economic level to grow in a healthy way. The main aim of this fiscal policy is to help the consumers of a particular country to pay less amount of taxes.

Purpose of Contractionary  fiscal policy is to decrease the expansion of monetary rate by the central bank of the country.

Expansionary fiscal policy can increase the rate of inflation in the country because their is a higher demand in the economy. Since the main objective of this fiscal policy is to borrow from the government of the country. Therefore, the interest rate increases.

In case of contractionary fiscal policy the interest rate falls. The rate of unemployment can increase when this type of fiscal policy is used but in a very small level. Since in this case borrowing from government decreases therefore private investments generally increases.

Goal of Contractionary Fiscal policy.

The main goal of the central bank using this policy is to decrease the rate of inflation by decreasing the number of active money which is getting circulated in the market. Thus, decrease in the inflation rate can decrease the interest rate and unemployment also gets reduced to a certain level.

Goal of expansionary Fiscal policy

The main goal of the central bank using this policy is to decrease the interest rate and it also aims at increasing more amount of money in the system. This helps in the increase in GDP of the country.

Both monetary policies as well as fiscal policies consist of their own pros and cons. According to me monetary policy is more effective. Monetary policy can be implemented by the central bank in fair as well as easy way. Since Central bank is independent and there is no political influence, therefore, actions against any unpopular monetary policy can be undertaken even during the time of the elections because there is no political pressure or repercussions. When there is increase in the supply of money the currency gets weaken and thus it can help in the increase in exports from the country.

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