Introduction
During a recession, consumption and investment are low due to a diminished supply of funds in the economy of Macropoland. The rate of inflation has been at an average of two percent but has dropped to 0.4 percent. This points to a significant reduction in the purchasing power of the population. Hence, there is a diminished demand for local products, adversely affecting the profitability of various companies. Investors will, thus, tend to shy away from committing their funds. In times like these, government intervention is necessary to steer the economy out of recession. This paper discusses expansionary monetary and fiscal policies that can be used by Macropoland for economic stimulation.
Expansionary Monetary Policies
These policies will be implemented under the auspices of the central/governing bank of Macropoland. They mainly involve loosening monetary policies (Pettinger). They involve reducing interest rates or boosting the supply of money in the economy. If implemented in a measured and structured process, they stimulate the economy, improving the country’s performance (Pettinger).
The current rate of inflation of 0.4 percent compared to the average of two percent shows a significant economic downturn. With the setting of lower interest rates, the cost of capital for the various industries and firms in the country becomes cheaper (Pettinger). This encourages the taking of loans by these companies to improve their production capacities and finance their processes. Their expansion increases the rate of employment in the country as new staff is absorbed. They can invest in efficient technologies enabling them to cut costs of production. This results in a cheaper product for the consumer and increased profitability for the firms. With lower rates, individuals have a reduction in the value of their payment installments (Pettinger). This frees up more money for consumers, increasing their purchasing power. They are thus able to support the local companies through their enhanced spending.
The governing bank can also implement quantitative easing (Pettinger). This increases the supply of money in the economy. More money is printed enabling the government to buy back government bonds from commercial banks. Through this method, the interest rates also go down. Investors are thus encouraged to seek returns in local companies.
Expansionary Fiscal Policies
The implementation of these policies falls under the jurisdiction of the Department of Finance especially the Treasury. They mainly involve modifications to the government budget. This can be through an increase in government spending or reduction/ elimination of taxes (Phuc Canh, p. 51).
In economic downturns, spending is usually reduced. The government is one of the biggest clients for various services and products. To offset the drop in demand by consumers and companies, it increases its demand for the products. This can be through the establishment of infrastructure projects. These projects are avenues for direct employment for individuals and companies. They can also indirectly contribute to employment as the improved profitability of the involved firms fuel their expansion. For instance, the New Deal formulated by President Franklin Roosevelt of the United States in1933 was based majorly on increased governmental expenditure (“President Franklin Delano Roosevelt And The New Deal”).
Taxes can also be reduced for consumers or businesses (Phuc Canh, p. 52). For consumers, they will have a higher amount of money available for spending. For businesses, this will reduce their cost of production, improving their profitability and increasing the demand for their products.
Conclusion
These policies are essential in improving the economic performance of the country. However, they can have adverse effects as they may lead to over-inflation. Hence, these policies should be for the short-term or when desired targets of inflation are achieved. This ensures that the country is competitive in the global space and its optimal performance.
Works Cited
“President Franklin Delano Roosevelt And the New Deal.” Library of Congress, 2019.
Pettinger, Tejvan. “Expansionary Monetary Policy.” Economics Help, 2017.
Phuc Canh, Nguyen. “The Effectiveness of Fiscal Policy: Contributions from Institutions and External Debts.” Journal of Asian Business and Economic Studies, vol 25, no. 1, 2018, pp. 50-66. doi:10.1108/jabes-05-2018-0009.