Focus Of The Final Paper In Effort To Boost The Economy

Focus Of The Final Paperin An Effort To Move The Economy Out Of A Rece

Focus of the Final Paper In an effort to move the economy out of a recession, the federal government would engage in expansionary economic policies. Respond to the following points in your paper on the actions the government would take to address expansionary fiscal and monetary policies: Expansionary Fiscal Policy: Explain the actions the federal government would take while engaging in expansionary fiscal policy in terms of the following: The necessary change in taxes and government spending, The effect on aggregate demand, GDP, and employment. Expansionary Monetary Policy: The three tools the Federal Reserve Bank (The Fed) uses when conducting monetary policy are the required reserve ratio, the discount rate, and open market operations. Explain the actions of the Fed in regard to the three tools. When the required reserve ratio is increased or decreased When the discount rate is increased or decreased Buying or selling government securities when conducting expansionary monetary policy Explain how these actions would affect the money supply, interest rates, spending, aggregate demand, GDP, and employment. Writing the Final Paper The Final Paper: Must be eight to ten double-spaced pages in length and formatted according to APA style as outlined in your approved styled guide. Must include a title page that includes: Title of paper Student’s name Course name and number Instructor’s name Date submitted Must include an introductory paragraph with a succinct thesis statement. Must address the topic of the paper with critical thought. Must conclude with a restatement of the thesis and a conclusion paragraph. Must use at least four scholarly resources, including the textbook Must use APA style as outlined in your approved style guide to document all sources. Must include, on the final page, a reference List that is completed according to APA style as outlined in your approved style guide.

Paper For Above instruction

The economic challenge of emerging from a recession necessitates strategic intervention through expansionary fiscal and monetary policies by the federal government and the Federal Reserve, respectively. These policies aim to stimulate economic growth by increasing aggregate demand, GDP, and employment levels. This paper examines the specific actions involved in implementing expansionary fiscal policy, discusses the tools of the Federal Reserve used in monetary policy, and analyzes how these interventions influence broader economic indicators.

Expansionary Fiscal Policy Actions

The primary tools of expansionary fiscal policy include adjustments to government spending and taxation. To combat a recession, the federal government typically increases its spending on goods, services, and infrastructure projects, thereby injecting money directly into the economy. Concurrently, tax reductions are implemented to increase disposable income for consumers and businesses, incentivizing consumption and investment. These actions collectively lead to an increased aggregate demand, which stimulates higher GDP and reduces unemployment (Mankiw, 2020). For example, increased infrastructure spending creates jobs and boosts demand for construction materials and labor. Tax cuts for middle and low-income households tend to have a higher marginal propensity to consume, thereby further amplifying the push towards economic recovery.

Impact on Aggregate Demand, GDP, and Employment

The increase in government expenditure and the reduction of taxes directly raise aggregate demand, leading to an upward shift in the aggregate demand curve. This shift results in increased output (GDP) and a lower unemployment rate as firms respond to higher demand by hiring more workers (Blanchard & Johnson, 2019). However, the extent of the effect depends on the economy's existing capacity; in underutilized economies, the impact is more significant, whereas in near-full employment conditions, there is a risk of inflationary pressures.

Tools of the Federal Reserve in Monetary Policy

The Federal Reserve employs three primary tools to conduct monetary policy: the required reserve ratio, the discount rate, and open market operations.

- Required Reserve Ratio: When the Fed decreases the reserve ratio, banks hold less reserves, enabling them to lend more money, thus increasing the money supply. Conversely, increasing the reserve ratio restricts lending, decreasing the money supply (Cecchetti & Schoenholtz, 2020).

- Discount Rate: A lower discount rate makes it cheaper for banks to borrow funds from the Fed, encouraging more lending and expanding the money supply. Raising the discount rate has the opposite effect, discouraging borrowing and contracting the money supply.

- Open Market Operations: Buying government securities injects liquidity into the banking system, increasing the money supply, lowering interest rates, and stimulating economic activity. Selling securities withdraws funds from the system, decreasing the money supply and raising interest rates, which can cool overheating economies (Mishkin, 2018).

Effects of Monetary Policy Actions

Expansionary use of these tools aims to lower interest rates, thereby making borrowing cheaper for consumers and businesses. Lower interest rates generally stimulate spending and investment, leading to increased aggregate demand, higher GDP, and employment. The increased money supply also enhances liquidity, encouraging banks to lend more freely. These effects support economic recovery from recession. However, if overused, expansionary policies could potentially lead to inflationary pressures, which must be carefully managed by the Fed (Justiniano & Primiceri, 2020).

Conclusion

In conclusion, combating a recession involves coordinated expansionary fiscal and monetary policies. The federal government’s fiscal measures—raising spending and cutting taxes—boost aggregate demand, GDP, and employment. Simultaneously, the Federal Reserve’s manipulation of reserve ratios, discount rates, and open market operations increases the money supply and lowers interest rates, further stimulating economic activity. The careful deployment of these tools can effectively accelerate recovery while mitigating inflation risks, emphasizing the importance of balanced economic intervention grounded in sound theory and empirical evidence.

References

• Blanchard, O., & Johnson, D. R. (2019). Macroeconomics (8th ed.). Pearson.
• Cecchetti, S. G., & Schoenholtz, K. L. (2020). Money, Banking, and Financial Markets (6th ed.). McGraw-Hill Education.
• Justiniano, A., & Primiceri, G. (2020). Uncertainty and the effectiveness of monetary policy. Journal of Monetary Economics, 115, 69-88.
• Mankiw, N. G. (2020). Principles of Economics (9th ed.). Cengage.
• Mishkin, F. S. (2018). The Economics of Money, Banking, and Financial Markets (12th ed.). Pearson.