7B GOV’TS ROLE INSTABILIZING THEECONOMYEPF7 demonstrate knowledge of how monetaryand fiscal policy influence employment, outputand prices
Gov’ts Role in Stabilizing theEconomy Federal government fiscal policies, along with the Federal Reserve System’s monetary policies, influence the overall levels of employment, output, and prices. Fiscal policy decisions are decisions to change the level of spending and tax levels by the federal government. These decisions are adopted to influence national levels of output, employment, and prices. The Federal Reserve System is a mix of public and private elements.
When would the gov’t be likely topursue expansionary fiscalpolicy? How would the fiscalpolicy tools be used in this case?
Expansionary Fiscal Policy Under conditions of slow growth or high unemployment, expansionary fiscal policy could stimulate the economy. In the short run, increasing federal spending and/or reducing taxes can promote more employment and output, but these policies eventually put upward pressure on the price level and interest rates.
When would the gov’t be likely topursue contractionary fiscalpolicy? How would the fiscalpolicy tools be used in this case?
Contractionary Fiscal Policy Under inflationary conditions, the government may choose contractionary fiscal policy to slow the economy. Decreased federal spending and/or increased taxes tend to lower price levels and interest rates, but they reduce employment and output levels in the short run.
How does monetary policy affectthe overall levels of prices,employment and output?
Effects of Monetary Policy Monetary policy decisions by the Federal Reserve System lead to changes in the supply of money and the availability of credit. Changes in the money supply can influence overall levels of spending, employment, and prices in the economy. Monetary policy affects interest rates in the economy. Interest rates act as incentives that influence people’s spending and saving decisions. To fight inflationary pressure, the Federal Reserve System could implement monetary policy that causes higher interest rates in the economy. Higher interest rates would discourage personal and business borrowing and spending and relieve inflationary pressure.