Expansionary Fiscal and Monetary Policies: Actions Undertaken by the Federal Reserve

Running head: Final Paper
Title of paper: Final Paper
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Final Paper
Introduction
The current elucidates illustratively about the actions undertaken by the Federal Reserve to
move out of recession. The study at hand also explains in detail about the actions that the
government undertakes for addressing expansionary fiscal as well as monetary policies. The
current section explicates illustratively regarding expansionary fiscal policies from the
perspective of the essential alteration in taxes as well as government spending, impact on
aggregate demand, employment as well as GDP. Moving further, the present study also
illustrates in detail about the expansionary monetary policy and the tools that the Federal
Reserve utilizes at the time of undertaking monetary policy.
Expansionary Fiscal Policy
- Necessary changes in taxes and government spending
The fiscal policy is in effect the way by which a particular government adjusts levels of
spending and rates of taxation for monitoring and influencing economy of a nation. Basically,
it can be regarded to be a sister strategy to monetary policy by which a central bank exerts
influence on supply of money of a nation (Nakamura & Steinsson, 2014). Therefore, it can be
hereby said that fiscal policy elucidates two different governmental activities by the
government that includes taxation and government spending. By means of levying tax,
governing bodies accept and at the same time serve diverse specific purposes, however, the
important notion is that taxation is a way of transferring assets from mainly the people to the
government. Particularly, the second action is primarily government spending. This might
perhaps be in the form of wages to government employees, social security advantages, and
superior road facility otherwise fancy weapons. At the time when the government expends,
they reassign assets from itself to general public (even though in case of weaponry, it is not
always obvious that the population holds the assets) (Melosi, 2016). As taxation along with

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government spending reflects reversed flows of asset, these policies can be considered to be
opposite strategies.
Essentially, lessening taxes and increasing government spending can be regarded to be
expansionary fiscal policies. At the time when the government lowers taxes, consumers have
higher disposable earning. At the time when the government decreases level of taxes,
different consumers have considerably higher disposable income. In terms of economy on the
whole, this can be replicated in the output equation presented below:
Y= C(Y-T)+I+G+NX
Here, Y reflects gross domestic product, C represents consumption that includes both durable
as well as non-durable products as well as services. I reflect Investment that is comprised of
value possessed by businesses as raw materials and work in progress, inventory of different
unsold finished goods, different plant along with equipment and many others (Tabellini,
2016).
In this case, a reduction in T, provided a stable Y directs the way towards an enhancement in
C and finally to an increase in Y.
Increasing spending of the government is said to have similar effects. At the time when
government expends more amount of money on both goods as well as services, accepts more
amount of money (Hagedorn et al., 2017). When considered in terms of the economy on the
whole, this again can be reflected by the equation represented below:
Y=C(Y-T)+I+G+NX
In this case, an enhancement in G leads to enhancement in Y. Therefore, expansionary fiscal
policies help in making the populace wealthier and augment output, otherwise national
earning.

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- Effect on aggregate demand, GDP and employment
Fiscal policy exerts impact on aggregate demand through alterations in government spending
as well as taxation. Essentially, government spending along with taxation exert impact on
employment along with household income that in turn dictates spending level of consumers
and investment. Expansionary fiscal policies normally implemented in response to recessions
or else employment shocks, enhances government expenditure in definite areas namely
infrastructure, education as well as unemployment benefits (Tenreyro & Thwaites, 2016). As
per Keynesian economics, these specific programs prevent a negative transformation in
aggregate demand by means of stabilizing employment among different government
employees and individuals engaged with stimulated sectors. Essentially, extended benefits of
unemployment help in process of stabilization of consumption and investment of different
jobless individuals during recessionary period.
Figure 1: Expansionary Policy on GDP/aggregate demand
(Source: Baker et al., 2016)
Normally, fiscal policy is said to exert impact on GDP by means of influencing aggregate
demand. At the time when the government alters the fiscal policy, it alters the amount of