Monetary and Fiscal Policy

Andrea Garza

Econ 2301

Monetary & Fiscal Policy

        Macropoland is facing a high unemployment rate at 9% and a low inflation rate at 0.4% expansionary monetary and fiscal policies are required to help boost the economy. These polices are associated with the increases of money supply, which will boost the economy and lower interest rates. Fiscal policy involves government taxation for public spending, and expansionary fiscal policies involves decreasing taxes revenue as a result an increased expenditure which will boost the economy. Another option is to cut spending and boost tax revenue. Since Macropolands is under recession the output is weak, with a high unemployment and low expenditures. With the low interest rates this discourages investments because the people believe if they wait they will pay a cheaper price in near future.

        An expansionary monetary policy will be to lower the interest rates therefore encouraging borrowers to get loans. When the interest rates are low the interest payments will be low, therefore business will be encouraged to borrow. When business borrow more they will be able to grow their business bigger as a result hire more employees. This will bring the unemployment rate down and people will be able to buy goods and services for their households. There are also people who borrow money for other investments that will also increase aggregate demand.

        Lowering taxation would also boost Macropolands economy, since it will lower the amount of taxes the people and business will pay. With lower taxes the people will spend the money in other goods and services rather than taxes. Business will be encouraged to higher more employees with the extra revenue they will have. Lowering the taxes will provide a higher revenue since taxes lower the business profits. If business invest and higher more workers the return will be greater, because they will be able to provide more goods and services for the economy. By reducing tax rates, the tax rates are then associated with an increased investment expenditure. As business spend more the inflation rate would rise to around 2%. Business will increase their productivity when they expect the economy will improve with the tax cuts. Lower taxes not only benefit business, but they also benefit individuals leaving the individual with a higher income.