EXPANSIONARY POLICY (MACROECONOMICS 203
Running Head: EXPANSIONARY POLICY 1
Expansionary Economic Policy ECO203 April 8, 2013
EXPANSIONARY POLICY 2
Expansionary policy is a macroeconomic policy that seeks to expand the money supply to encourage economic growth or combat inflation. One form of expansionary policy is fiscal policy, which comes in the form of tax cuts, rebates and increased government spending. Expansionary policies can also come from central banks, which focus on increasing the money supply in the economy. The U.S. Federal Reserve employs expansionary policies whenever it lowers the standard fed funds rate or discount rate or when it buys Treasury bonds on the open market, thereby injecting capital directly into the economy. I will focus this paper on these policies and theories, and how the federal government would engage them in an effort to move the economy out of a recession. The Great Depression challenged the classical model with the reality of a long depression and high unemployment. In The General Theory, Keynes attacked the classical model in two important ways. First, he identified some flaws in the model. Second, unlike the business cycle theorists, he offered a well-developed alternative model of the macroeconomy. This model was the basis for the Keynesian revolution, the change in macroeconomic theory and policy that occurred when Keynes's ideas displaced the classical explanation of how output and employment are determined. The Keynesian model
Expansionary Economic Policy ECO203 April 8, 2013
EXPANSIONARY POLICY 2
Expansionary policy is a macroeconomic policy that seeks to expand the money supply to encourage economic growth or combat inflation. One form of expansionary policy is fiscal policy, which comes in the form of tax cuts, rebates and increased government spending. Expansionary policies can also come from central banks, which focus on increasing the money supply in the economy. The U.S. Federal Reserve employs expansionary policies whenever it lowers the standard fed funds rate or discount rate or when it buys Treasury bonds on the open market, thereby injecting capital directly into the economy. I will focus this paper on these policies and theories, and how the federal government would engage them in an effort to move the economy out of a recession. The Great Depression challenged the classical model with the reality of a long depression and high unemployment. In The General Theory, Keynes attacked the classical model in two important ways. First, he identified some flaws in the model. Second, unlike the business cycle theorists, he offered a well-developed alternative model of the macroeconomy. This model was the basis for the Keynesian revolution, the change in macroeconomic theory and policy that occurred when Keynes's ideas displaced the classical explanation of how output and employment are determined. The Keynesian model