Gm 545 You Decide (Economics)

You Decide
GM 545
Fall 2010

Mr. President,
Monetary and fiscal policy are two ways in which governments attempt to achieve full level of employment, economic growth, and price stability. As you are aware, fiscal policy decisions are made by the President and Congress and demand the use of government spending and taxation to influence the economy; the monetary policies are maintained by the Federal Reserve.
After careful consideration of the advice of Economic Advisers and Federal Reserve consultants, I came to the following conclusions regarding economic recovery in The United States: * Executing Expansionary Fiscal Policy, increasing government spending, transfer payments (Social Security, unemployment compensation, and welfare payments) and decreasing taxes will lead to increased aggregate demand (Stone, 2008). Contrary to Ms. Lee’s advice to raise taxes and decrease government spending, and in accordance with Ms.Tanney, I recommend the opposite: decrease taxes and increase government spending. Government spending will, it theory, create new jobs as government’s consumption of services from construction industry increases. A good incentive for job creation would be offering tax credits to employers who hire new, unemployed workers. Decreased taxes, again in theory, will create more disposable enabling individuals and corporations to increase their consumption. Increased consumption leads to, again, increase in job creation, corporate profits, consumer confidence, and real GDP. * On the monetary side, the government should: * Lower interest rate * Lower reserve requirements * Purchase government bonds in the open market.
All these lead to expansionary monetary policy. I disagree with Ms. Lopes’ opinion that The Fed should sell bonds, raise reserves, and leave interest rates. To the contrary, purchasing bonds on an open market will increases the amount of money in circulation in the economy. When the Fed increases the money supply, it lowers the interest rate and increases the quantity of goods and services demanded at any given price level. (Stone, 2008). As suggested by Mr. Burke, lowering the interest rates and reserve requirement enables banks to lend more money to consumers at a cheaper rate since the access to reserve capital more accessible. Lower interest rates encourage consumption and investment.
As the economy recovers and moves towards full employment, the government should reconsider expansionary measures, since, in the long run, these measures can lead towards budged deficits and increased inflation.
References:

Gerald W. Stone, 2006, Core Economics http://www.federalreserve.gov/ www.investopedia.com

References: Gerald W. Stone, 2006, Core Economics http://www.federalreserve.gov/ www.investopedia.com