Macroeconomics Assignment Solved

Added on - 15 Apr 2020

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Running head: MACROECONOMICSMACROECONOMICSName of the StudentName of the UniversityAuthor’s Note
1MACROECONOMICSTable of contentsIntroduction......................................................................................................................................2Actions taken by Federal government while engaging in expansionary fiscal policy in terms oftaxes and government spending.......................................................................................................2Effect on aggregate demand, GDP and employment.......................................................................3Actions taken by Federal Reserve Bank in regard to reserve ratio, discount rate, open marketoperations.........................................................................................................................................5Actions of the Federal Bank influencing the money supply, interest rates, spending, aggregatedemand, GDP and employment.......................................................................................................7Conclusion.......................................................................................................................................8References......................................................................................................................................10
2MACROECONOMICSIntroductionThe objective of this report is to analyze on the actions taken by the Federal Governmentfor addressing the expansionary fiscal and monetary policy. Expansionary fiscal policy refers tothe macroeconomic policy taken by the federal government that seeks in expanding moneysupply for enhancing economic growth or combating increase in inflationary price (Mankiw,2014). On the other hand, expansionary monetary policy refers to the policy that helps inincreasing money supply for reducing unemployment, boosting borrowing in private sector andconsumer expenditure. Fiscal policy is mainly based on the federal government powers ofexpenditure and taxation. However, the Federal government takes action on both taxation as wellas government spending for either increasing or decreasing money supply in the economy. Inaddition, the Federal Reserve System also exercises their power through monetary policy forregulating interest rate and money supply (Corsetti et al., 2013). This study also provides a viewon the effects of expansionary fiscal policy on the aggregate demand, GDP and employment ofthe nation. The actions taken by the Federal Reserve system in regards to three tools such asreserve ratio, discount rate and open market operations is also explained in this report. This studyalso elucidates on the impact of these actions on money supply, interest rate, aggregate demand,GDP, spending and employment.Actions taken by Federal government while engaging in expansionary fiscal policy in termsof taxes and government spendingThe federal government uses this fiscal policy for either stimulating sluggish nation orslowing down the nation that is expanding at higher rate or going beyond control. Fiscal policycan be categorized in two types that include- expansionary policy and discretionary policy. When
3MACROECONOMICSthe nation is in recessionary phase, the federal government engages in expansionary fiscal policy.During this period, this policy results in rise in government expenditure and decline in taxes. Therecession leads to recessionary gap indicating that the aggregate demand is at lower level than itmight be in the full employment situation. However, the federal government increases theirgovernment spending for closing the recessionary gap, which in turn directly increases thenations’ aggregate demand (Afonso & Sousa, 2012). Furthermore, the federal government alsotakes action in cutting taxes, which indirectly influences the aggregate demand. Hence, thisallows the consumers in having huge cash at their disposal to invest as well as consume. Inaddition, these actions taken by the government also encourages the business organization toexpand in the global market (Hansen, 2013). It also leads to rise in level of consumption, whichin turn stimulates the economic growth. Likewise, decrease in burden of tax on the private sectorstimulates investment in business. Thus, the federal government takes this action while engagingin expansionary fiscal policy for stabilizing the economy.Effect on aggregate demand, GDP and employmentThe government adopts expansionary fiscal policy to recover the economy fromrecessionary phase. The actions taken by the policymakers help in enhancing the aggregatedemand in the economy(Economicshelp.org, 2017).This in turn increases the employment leveland stimulates the GDP growth in the nation. In macroeconomic theory, aggregate demand (AD)refers to the total demand of final products and services produced within an economy at certainprice level (Arestis, 2012). According to Keynesian theory, AD is defined as the summation ofconsumption expenditure, investment expenditure, government spending and net export. Theequation is given as – AD= C+I+G+(X-M). As the government spending is one of the vitalcomponents of AD, increase in government spending shifts the AD curve in rightward direction.
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