Monetary and Fiscal Policy essay

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Recession is a term in economics that refers to the situation when there is a slowdown in economic activity. Various macroeconomic indicators are essential in determining whether a country is experiencing recession or not. These include rise in the unemployment rate, GDP, household income, capacity utilization, investment spending, business profits, inflation fall, and employment. Thus, a close look at some of the United States macroeconomic indicators prove that the United States is in a recession as will be explained in the essay. There are two main fiscal policy tools that can be used to stimulate the United States economy. These include changes in composition of taxation and reduction of government spending (Taylor, 2006). The Federal Reserve can also play a significant role in ensuring a reduction in recession. The two fiscal policies possible for the Federal Reserve include the contractionary fiscal policy and expansionary fiscal policy. Among the tools that the Federal Reserve can employ to reduce inflation due to money supply, one can include a change in the reserve specifications, discount rates, and open-market operations.

This paper proves that the United States is still in a recession and points out two fiscal policies that can be employed to stimulate the economy of the country. In addition, it observes a role played by the Federal Reserve in ensuring a reduction of recession through explicating the contractionary and expansionary fiscal policies. Finally, this paper explicates the change in the reserve ration specifications, discount rates, and open market operations as a role of the Federal Reserve in ensuring a reduction in inflation rates due to money supply.

Despite the U.S recession ending in 2009, several quarters of the opinion poll think that the country is still facing recession. In fact, almost 81 percent of Americans believe that the country is in a recession because of the following reasons. Firstly, despite the gyrations of the Wall Street and Main Street seem to end, investors lack confidence in the markets and feel that there will be poor earnings, which will result in trouble in the American market and will have a global impact. People’s opinion regarding the housing marketis another aspect that indicates the US is still in a recession (Dwivedi, 2010). Statistics by The Gallup indicates that a huge number of Americans assert that there is a persistent depression in the housing market. This fact stems from the credence of experts who indicate that the recovery of home prices will take a while. Another factor concerns the soaring unemployment rate, which according to the Federal Reserve will not fall below 8 percent by 2013. According to Dwivedi (2010), the cycle between low consumer confidence and fear among businesses indicates an escalation of layoffs, which make the recovery in joblessness and home prices rather difficult.

As an advisor of President Obama, I will point out two fiscal policy tools for stimulating the economy, which means I will make a change in government spending and taxation. I will do so because these two will have an effect on the price level and the real GDP (Seidman, 2003). In addition, these changes will ensure a reduction in the employment rate and stabilize prices. According to Seidman (2003), the abovementioned fiscal policy changes are essential in stimulating economic growth because an increase of the government spending or reduction of taxes, when all factors are constant, will facilitate theescalation of aggregate demand, which will increase the equilibrium level of real GDP and equilibrium price (Seidman, 2003).

In my opinion, Ben Bernake should suggest two options for the Federal Reserve such as stimulating the economy and increasing economic growth. These two fiscal policy tools include the expansionary monetary policy and contractionary fiscal policy (Meltzer, 2010).  Notably, expansionary monetary policy aids in the correction of a business-cycle contraction, which is key in addressing unemployment problems. Meltzer (2010) affirms that this policy focuses on increasing the money supply through decreasing of interest rates. The Fed can achieve this is through buying the U.S. Treasury securities in the open market, reduction of reserve requirements, and the lowering of discount rates (Meltzer, 2010). The second method that the Federal Reserve can adopt in ensuring economic stimulation and economic growth is referred to as contractionary fiscal policy. The Fed adopts this policy to address overheated business cycle expansion. Contractionary fiscal policy is the opposite of expansionary fiscal policy as it entails decreasing of transfer payments, decreasing of government purchases, and increasing taxes. For a clear understanding, it should be noted that decreasing aggregate expenditures have an effect of decreasing the aggregate production, which reduces inflation (Meltzer, 2010).

Three main tools at the disposal of the Fed that facilitate a reduction of inflation in terms of money supply include the change in reserve requirements, open-market operations, and a change in the discount rates. According to Meltzer (2010), open-market operations involve the Fed selling government securities such as the T-Bills. The selling of bonds has an effect of reducing money from the economy as the money moves from the people to the government; thus, reducing the inflation rates. Secondly, Taylor (2006) suggests that the Fed can employ the change in reserve requirements, wich determine the amount of money that is in the market. For instance, when the Fed raises the reserve requirements, banks have less money at their disposal, which limits their lending activities; thus, less money in the economy. Lastly, Taylor (2006) points out that changing of the discount rate functions well in correcting inflationary problems in an economy. According to Taylor (2006), when the Fed raises the discount rate, banks are also forced to raise the Prime, which discourages many people from borrowing money from banks; thus, less money in circulation. This method has effect of slowing down the economy, and it ensures lower inflation (Dwivedi, 2010).

In conclusion, this paper commenced with defining recessionas a term in economics that refers to the situation when there is a slowdown in economic activity. Various arguments also abounded proving that the U.S is facing a recession, especially the depression experienced in the housing market. In order to stimulate the economy and facilitate its growth at the same time, the President must make a change in government spending and taxation. According to Dwivedi (2010), this aids in stimulating economic growth because an increase of the government spending or reduction of taxes, when all factors remain constant, will facilitate escalation of aggregate demand. This will also increase the equilibrium level of real GDP and equilibrium price. On the other hand, the Federal Reserve has an option of adopting two fiscal policy tools to stimulate the economy and facilitate economic growth. These include the expansionary monetary policy and contractionary fiscal policy. Contractionary fiscal policy is the opposite of expansionary fiscal policy as it entails decreasing of transfer payments, decreasing of government purchases, and increasing taxes (Taylor, 2006). Lastly, the Fed can employ these three tools to reduce money inflation in the market. These tools include change in reserve requirements, open-market operations, and a change in the discount rates.

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