Expansionary Police Case Study

Expansionary Polices; Monetary and Fiscal

Expansionary economic policy seeks out to expand the money supply to boost economic growth. This policy also comes from central banks, which focus on increasing the money supply in the economy. In fiscal term, a decline is defined as an overall slowdown in economic activity, and in an attempt to move the economy out of a recession, the government would implement expansionary economic policies.

The Great depression challenged the classical model with the reality of a long depression and high unemployment rates. Keynes attacked the classical model in two important ways, first the acknowledgment of error in the model and secondly by offering a different, well developed model

Producers respond to this falloff in demand by producing less and laying off workers. The resulting unemployment further reduces demand. Recoveries happen when spending begins to rebound. However, even though demand begins to grow again, its level is below where it was when the recession started and far below where it would be if it had grown normally” (City Club, 2010). A recession is a situation where output growth is negative for two consecutive quarters, it is the period where unemployment rises, consumer and investor confidence falls and economy moves down. There are two main policies that aide in overcoming or dealing with recession, they are monetary policy and fiscal policy. Monetary policy is run by the central bank of a particular country while fiscal policy is run by the government of that respective country. During a recession, both government and the central bank are required to follow these policies, the government will follow expansionary fiscal policy and central bank will follow expansionary monetary

There are three main tools used to support stronger economic recovery; Discount rate, which is the rate which Federal Reserve charges commercial banks while lending to them. To support a strong recovery, Federal Reserve must reduce the discount rate; this will reduce the borrowing cost of commercial banks and will lower interest rates. This decline in borrowing cost would mean higher consumption and investment expenditure in the economy, causing aggregate demand to increase. The increase in aggregate demand would cause GDP and employment to increase and would help the economy recover faster. The next tool is, the Open market operation, this is where Federal Reserve buys or sells government security in the open market, and as a result money supply is affected. To support the economy, the Federal Reserve will buy government securities from the open market, increasing the money supply in the banking system. As a result, the interest rate will fall and borrowings will be cheaper and there will be expansion in investment and consumption expenditures, which again causes aggregate demand to increase and just like with discount rate, the increase in aggregate demand causes GDP and employment to increase and helps the economy to recover faster. The last tool, reduction in reserve requirement, this is the required reserve ratio, which is the ratio of total