Arguably, no country is ready to stand the effects of inflation, recession and rising rate of unemployment. Monetary policy is a method used by monetary authority of a country to regulate the supply of money in the economy. In most cases they use rate of interest in order to promote stability, growth, stabilization of prices and regulating the level of unemployment. Fiscal policy on the hand entails use of taxation and government spending to control the economy.
According to my colleagues, they recommend the president to lower rate of interest. In this case the president doesn’t have any power to lower the level of interest rate. Working together with the monetary authority, when the rate of interest is lowered it increases investment and consumer spending. The decision to lower interest rate will cause a reduction in cost of borrowing hence encouraging investment; reduce mortgage cost therefore disposable income of consumers increase and finally reduce the incentives to be saved. Cutting the interest rate during recession has the following impacts; may not encourage individuals to spend, during deflation interest rates at 0% becomes very ineffective, it reduces the value exchange rate, savers will experience a decline in savings value finally lowering interest rate takes long to correct recession in economy.
Lee calls for fiscal policy as a corrective measure. This is by increasing taxes and decreasing government spending, this will correct the deficit but increase recession. Lopez recommends sell of bonds and raise raising bank reserve. When bonds are sold it will reduce the supply of money in the economy but increase MS in the bank. Alison believes that expansionary fiscal and monetary policy will reduce recession.
In order to increase demand the president should increase the spending by the government. In addition decrease taxes in order to ensure that households get more income to dispose. During deflation in the economy, increase in spending and tax reduction will increase demand which in turn leads to increase in prices. Government spending have direct impact on the aggregate demand. The expansionary fiscal and monetary policies will push up demand hence households demand more. The increase in aggregate demand imparts pressure on prices to increase and finally make it stable. Increase on demand will cause production to increase hence many people will be employed. This will ensure that U.S economy stabilizers.
