Macropoland is a natural gas country, and it imports oil. It is experiencing an economic recession that has negatively affected the financial operations of the country. This paper will focus on addressing the issue the country is currently experiencing by recommending the fiscal and monetary policies needed. The report will link the challenges being shared to the ordinary tools of expansionary budgetary and expansionary monetary policies and stimulate the economic growth economy.
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Expansionary Monetary Policy
The expansionary monetary policy seeks to increase the supply of money in the economy. It will achieve this by lowering interest rates to encourage people to borrow more to raise money circulation. If the circulation of money is increased, it will change the spending pattern of the people. The circulation of money in the economy will make people spend more and impact their GDP. Injecting more money into the economy will increase consumer spending and enable businesses to invest in projects to generate revenue. From more investments by the corporations, more people will be employed hence solving the unemployment problem. Building on the same result of reducing unemployment rates, if more people are used or interest rates are reduced, people will be encouraged to take loans to start their businesses and employ themselves. The policy will also reduce the unemployment rate and possibly drop from 9% to any other reasonable percentage.
The government may also increase the supply of money to the economy by expanding open market operations. Expansionary monetary policy aims at reducing the rate of unemployment. The policy should be implemented with a lot of care for it to be effective. Otherwise, it will bring more harm to the country.
Expansionary monetary policy was successfully implemented in 1982 by Paul Volcker in the U.S during the inflation recession resulting from Federal Reserves. The procedure was again implemented in the U.S in 2007, 2008, 2009, and 2014 by cutting the discount rates and government securities purchase.
Expansionary fiscal policy
The government accomplished an expansionary fiscal policy by either cutting tax or spending more money on the budget. Slashing the taxes will leave businesses and consumers with more money to spend. The funds will help enterprises venture into more businesses to generate more revenue for the government and business owners. Implementing the policy will reduce the unemployment problem as more people get employed as either self-employed or operated by the business owners.
Suppose the government allocates more money to the projects through budgeting for the tasks to be completed. People will be employed as either casual or permanent employees, hence reducing the employment rate. If the projects are completed, they will generate more revenue for the government, therefore, stabilizing Macropoland’s economy. Tax cut reduces the government revenue and may create a budget deficit that may force the government to borrow money to fund projects.
The former USA President Trump used expansionary fiscal policy of tax cuts to leave money in the defense force’s hands for spending. Barrack Obama also used the procedure in conjunction with the Economic Stimulus Act of the tax cut and funding of the public projects to create more American jobs. President J.F. Kennedy used the policy to aid the country from the economic recession of 1960 and used it until the recession was over without minding the debt impact.
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Normal measures of expansionary monetary and fiscal policies come with both negative and positive impacts on the economy. If not well implemented, it may not save the purported function of aiding Macropoland from the economic recession currently experiencing. The policy may reduce the employment rate but increase the inflation rate from 0.4% to a higher rate even past the historical one. The supply of more money into the country’s economy may also make exporting to other countries cheap, and imports into the country are expensive, leading to the home currency’s devaluation.