How Fiscal Policy and Monetary Policy Work Together

Two important policy goals of the government and the Fed are to keep unemployment and inflation low, while at the same time making sure that GDP is increasing at an average of 3% per year. It is important to have the right mix of policies and that all the variables be timed perfectly.

Government is fiscal Policy and Federal is Monetary Policy. Monetary Policy is the one that cares if inflation gets out of hand.

Part 1: Assume that the country is in a period of high unemployment, interest rates are at almost zero,inflation is about 2% per year, and GDP growth is less than 2% per year.

  • Suggest how fiscal and monetary policy can move those numbers to an acceptable level keeping inflation the same.

  • What is the first action you would take as the president? As the chairman of the Fed? Why?

  • What would be your subsequent steps?

  • Make sure you include both the positive and negative effects of your actions, and include the trade-offs or opportunity costs. 

    Include the following concepts in your discussion:

  • Demand and supply of money  – (This is a Fed issue)

  • Interest rates – (This is a Fed issue)

  • The Phillips curve

  • Taxation – (This is a Government issue)

  • Government spending – (This is a Government issue)

  • Wages – (This is a Fed issue)

  • Costs of inflation – (This is a Fed issue)

  • The multiplier and the tax multiplier – (This is a Government issue)

  • The idea of tax rebates to stimulate the economy – (This is a Government issue)

    Part 2: Assume that the country is in a budget deficit and carrying a very large debt. Discuss the dangers of a high debt to GDP ratio and a growing budget deficit. Would this affect any policy changes you discussed in Part 1?

    Describe the concepts and measurement of Gross Domestic Product (GDP), unemployment, and inflation.

    Explain what is meant by “business cycles” and “economic growth and describe the factors that contribute to each.

    Demonstrate understanding of the relevance and impact of macroeconomics and how it impacts politics, the workplace, and people.

    References required

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