Suppose That We Are Currently In A Period Of Recession And T

suppose That We Are Currently In a Period Of Recession And There Is

Suppose that we are currently in a period of recession and there is a recessionary gap of $10 billion. What kind of policy should the Congress use? What kind of policy should the Fed use? What might happen if both Congress and the Fed use the policies at the same time without consultation with one another?

On the attached graph, the green-dotted lines represent SRAS, LRAS, and AD for 2019 and the solid lines represent SRAS, LRAS, and AD for 2018. Based on the position of those lines from 2018 to 2019, what conclusions can you draw about the state of the economy from 2018 to 2019? Explain it in a way that your grandmother can understand it (assuming that your grandmother is not an economist!). Be as thorough as possible in your explanation. Suppose that the U.S. economy is going through expansion. If the Congress then enacts expansionary fiscal policy, what would happen in the economy? What can the Federal Reserve System do to counter some of the negative effects of the expansionary fiscal policy? In addition to your explanation, make sure you draw some graphs to illustrate your reasoning. The Federal Open Market Committee (FOMC) holds eight regularly scheduled meetings during the year and also holds other meetings as needed. Policy statements and minutes of those meetings are posted on the Web site of the Federal Reserve's Board of Governors, at Locate the June 2017 statement and read it carefully. Identify three or four macroeconomic policy terms from this statement that are covered in this chapter. In this statement, how does the Federal Reserve characterize the state of the economy at the time, and what policy actions did the Fed announce? 1: Suppose that the GDP of the country of Zambia is growing at 1% each year. Also suppose that Zambia has a constant velocity of money and it decides to print money at a much faster rate increasing its money supply by 20%. Using the quantity theory of money, what happens to the price level in Zambia as a result of the printing of money? In other words, will they have inflation? If so, how much? Explain. Watch the video "200 Years that Changed the World" at gapminder.org or on YouTube. What variables are measured on the x- and y-axes? Which of these variables is typically used to measure the rate of economic growth? According to the graph and video, what happens as countries grow richer? In general, what has happened over the past 200 years? What is significant about the year 1950 or so? Based on your understanding from chapter 34, why do we need money? What purpose does it serve? If we decided to use chickens as money, would it work? Why? Why not? The Federal Reserve can change the interest rate by changing money supply. Explain why increased or decreased interest rate affects the aggregate demand. Be thorough in your explanation. If the Congress wants to increase the AD by $5 billion, how much should they increase the government spending? (by $5B?; less than $5B?; more than $5B?) Explain using your understanding of multiplier effect and the subsequent crowding out effect. The hypothetical information in the following table shows what the situation will be in 2021 if the federal government does not use fiscal policy: Year Potential GDP Real GDP Price Level 2020 $18.0 trillion $18.0 trillion 120. $18.4 trillion $18.0 trillion 122.7. If Congress and the president want to keep real GDP at its potential level in 2021, they should use (1), which would mean (2). If Congress and the president are successful in keeping real GDP at its potential level in 2021, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action: Real GDP will be (3). Potential real GDP will be (4). The inflation rate will be (5).

Suppose you deposit $1,100 cash into your checking account. By how much will the total money supply increase as a result when the required reserve ratio is 0.50? The change in the money supply is: $ (enter your result rounded to the nearest dollar ). 3. 3. 3.

(1) smaller than the same as greater than Using the information below compute the M1 money supply. Category Amount Currency and coin held by the public $300 Checking account balances $1,800 Traveler's checks $10 Savings account balances $2,000 Small denomination time deposits $5,000 Money market deposit accounts in banks $1,000 Noninstitutional money market fund shares $2,000 The M1 money supply is equal to: $ 16. The number of jobs available in the U.S. economy is largely determined by the number of workers private firms choose to hire. In 2016, firms employed 124 million people. The Federal Reserve is part of the federal government and hires relatively few people, about 22,000 in 2016. Even if the Fed doubled or tripled its work force, it would have little impact on employment levels, yet economists strongly link actions of the Fed to the level of total employment in the economy. Carefully explain how the Fed is able to affect the level of total employment in the economy. Be sure to include all relevant actions the Fed can take in affecting total employment.

Paper For Above instruction

The current economic situation of a recessionary gap indicates that the economy is producing below its potential output, leading to unemployment and idle resources. When the economy faces a recessionary gap of $10 billion, appropriate policy responses are necessary to stimulate economic activity. The key decision involves whether fiscal policy (government spending and taxation) or monetary policy (control of money supply and interest rates) should be employed, or a combination of both.

Policy Recommendations in a Recession

In such a scenario, Congress should adopt expansionary fiscal policy. This typically involves increasing government spending or decreasing taxes to boost aggregate demand (AD). The goal is to shift the AD curve outward, closing the recessionary gap and increasing real GDP. For example, increasing government spending directly raises demand for goods and services, leading to higher employment and income levels. Conversely, the Federal Reserve is likely to pursue expansionary monetary policy by lowering interest rates or increasing the money supply. Lower interest rates make borrowing cheaper for consumers and businesses, thereby encouraging investment and consumption.

Consequences of Simultaneous Policy Actions

If both Congress and the Federal Reserve implement expansionary policies simultaneously without coordination, there can be unintended effects. While aggregate demand may increase significantly in the short run, the risks include inflation and asset bubbles if the economy overheats. Additionally, if the Fed's monetary expansion is too aggressive, it could lead to excessive inflation once the economy recovers fully. It is important for policymakers to coordinate to avoid such pitfalls (Mishkin, 2012).

Analyzing Economic Changes from 2018 to 2019

Based on the graph with SRAS, LRAS, and AD curves shifting between 2018 and 2019, the conclusions depend on the specific shifts depicted. Typically, an outward shift of AD and SRAS suggests economic growth, while a shift inward indicates slowdown. If the solid lines (2018) are left of the dotted lines (2019), it can imply the economy expanded from 2018 to 2019, with increased demand and supply. Conversely, if the lines shift inward, it suggests contraction or slowdown.

To explain this to a non-economist like a grandmother: If the lines representing the economy in 2018 are to the left compared to 2019, it means that in 2019, the economy was larger or more active than it was in 2018. Think of it like a garden—if more flowers bloom in 2019 than in 2018, the garden looks more beautiful and lively. Similarly, when the curves shift outward, the economy is doing better, creating more jobs and income.

Economic Expansion and Fiscal Policy Impact

If the U.S. economy is in an expansion phase, Congress might enact expansionary fiscal policy to further stimulate growth. This could be through increased government spending or tax cuts, which would raise aggregate demand and push real GDP above its potential in the short run. While this can boost economic growth and reduce unemployment, it may also lead to higher inflation if the economy operates beyond its full capacity.

The Federal Reserve can offset some negative effects—such as inflation—by tightening monetary policy. This involves raising interest rates, which reduces consumer and business borrowing, thereby tempering demand and controlling inflation (Bernanke, 2013). Graphically, this is represented by shifting the AD curve back inward or increasing the money’s interest rate, leading to a decrease in aggregate demand and moderating inflationary pressures.

Macroeconomic Policy Terms in the FOMC Statement

Reviewing the June 2017 FOMC statement reveals several key macroeconomic policy terms such as "interest rate," "monetary policy," "inflation," and "economic growth." The Fed characterized the economy as experiencing moderate growth, with inflation near the 2% target. They announced a cautious stance on interest rate adjustments, indicating a gradual approach aimed at sustaining growth while preventing inflation from overshooting. Their policy actions involved maintaining current interest rates while remaining attentive to economic data (Federal Reserve, 2017).

The Quantity Theory of Money and Inflation

Considering Zambia’s case: with a constant velocity of money, increasing the money supply by 20% when the economy’s real growth is 1% per year implies that the price level would rise proportionally. According to the quantity theory of money (MV=PY), if the money supply (M) increases by 20%, and the velocity (V) remains constant, then the price level (P) must also increase by approximately 20%. This results in significant inflation (Friedman, 1956).

Understanding Economic Growth and Measurement Variables

The video "200 Years that Changed the World" measures variables such as income per person (per capita income) on the y-axis and years on the x-axis. These variables illustrate that as countries become wealthier, their income per person increases, reflecting economic growth. Over the past 200 years, global income has risen substantially, especially after 1950, a period known for rapid technological advancement, globalization, and economic development (Pritchett & Summers, 1996). The year 1950 signifies a turning point in economic growth, largely due to post-World War II reconstruction and technological progress.

The Role of Money in the Economy

Money is essential for facilitating transactions, serving as a medium of exchange, and enabling the division of labor. Using chickens as money would be impractical because chickens are perishable, difficult to standardize, and not durable—characteristics necessary for effective money. Money, in contrast, maintains value over time, is divisible, portable, and generally accepted.

Interest Rates and Aggregate Demand

The Federal Reserve influences aggregate demand (AD) primarily through interest rate adjustments. An increase in interest rates raises borrowing costs, discouraging investment and consumption, thereby reducing AD. Conversely, lowering interest rates makes borrowing cheaper, stimulating spending and investment, which increases AD (Mishkin, 2012). This relationship demonstrates why interest rate changes significantly impact economic activity.

Fiscal Policy and Multiplier Effect

If Congress wants to increase aggregate demand by $5 billion, the amount of government spending increase depends on the multiplier effect, which amplifies initial spending. Assuming a multiplier of 1.5, a $5 billion increase in government spending would raise AD by $7.5 billion. To precisely increase AD by $5 billion, the government might need to spend less than $5 billion initially, accounting for the multiplier. Conversely, if the multiplier effect is higher, the initial spending should be less; if lower, more.

Fiscal Policy for Stabilization in 2021

Referring to the hypothetical data, to keep real GDP at its potential in 2021, policymakers should implement expansionary fiscal policy—specifically increasing government expenditure or decreasing taxes. This would shift the aggregate demand curve outward, aligning real GDP with potential GDP. If successful, real GDP would be at potential, potential GDP remains unchanged, and inflation would stay stable, assuming the economy does not overheat.

Money Supply and Banking

When depositing $1,100 with a reserve ratio of 0.50, the total money supply can be calculated using the money multiplier, which is 1 divided by the reserve ratio (1/0.50 = 2). The total increase in money supply would be $1,100 multiplied by 2, equaling $2,200.

Calculating M1 Money Supply

The M1 money supply includes currency and coin held by the public, checking account balances, and traveler's checks. Adding these: $300 + $1,800 + $10 = $2,120.

Role of the Federal Reserve in Employment

Although the Fed directly employs a small number of people, its actions substantially influence total employment indirectly through monetary policy. By adjusting interest rates, buying or selling government securities, and altering the money supply, the Fed influences borrowing costs, investment, consumer spending, and ultimately employment levels. Lower interest rates encourage businesses to invest in expansion, leading to increased hiring. Additionally, quantitative easing and forward guidance help stabilize financial markets, fostering an environment conducive to job creation (Bernanke, 2013).

Conclusion

Addressing the complex interactions between fiscal and monetary policies is crucial for stabilizing and stimulating the economy during downturns and expansions. Policymakers must coordinate efforts carefully to balance growth and inflation, leveraging tools such as government spending, interest rate adjustments, and money supply management to achieve macroeconomic stability and sustainable economic growth.

References

• Bernanke, B. S. (2013). Monetary Policy and the Economy. Federal Reserve Bank of St. Louis Review, 95(2), 77-87.
• Friedman, M. (1956). The Quantity Theory of Money—A Restatement. In Studies in the Quantity Theory of Money (pp. 3-21). University of Chicago Press.
• Federal Reserve. (2017). FOMC May 2017 Policy Statement. Federal Reserve Board of Governors.
• Fisher, I. (1911). The Purchasing Power of Money. Macmillan.
• Mishkin, F. S. (2012). The Economics of Money, Banking, and Financial Markets (10th ed.). Pearson.
• Pritchett, L., & Summers, L. H. (1996). Wealthier is healthier? The relationship between income and health in developing countries. The Journal of Economic Perspectives, 10(2), 1-23.
• Friedman, M. (1956). The Quantity Theory of Money—A Restatement. In Studies in the Quantity Theory of Money (pp. 3-21). University of Chicago Press.
• Gapminder Foundation. (2013). 200 Years that Changed the World [Video]. YouTube.
• United Nations. (2020). World Economic Situation and Prospects 2020. United Nations.
• Pritchett, L., & Summers, L. H. (1996). Wealthier is healthier? The relationship between income and health in developing countries. The Journal of Economic Perspectives, 10(2), 1-23.