Phelsalovistan Economy

Fiscal Policy:

The Phelsalovistan Economy should apply an expansionary fiscal policy to it’s problems, therefore decreasing unemployment and increasing inflation. By giving more control to the employers and more money to the consumers through lowered taxes, production and demand for high ticket durables will increase; therefore businesses will need to hire more people. Although this may increase the government’s national debt and require loans from other countries, the increased GDP will eventually be able to pay off the deficits.

Monetary Policy:

The Federal Reserve should also use an expansionary monetary policy to increase the money supply in its country by lowering the required reserve in its banks and making more open-market purchases

The inflation will cause the price levels to increase, but since the real GDP will increase as a result of lower average interest rate. Since the wages and employment rates in the economy will be rising, people will have more money in their pockets to be able to afford the price levels at a high price index. This can be good that the consumers will be able to afford most of the item s in the economy, but eventually, inflation could threaten the price levels the suppliers will need to charge to grow in the economy.

GDP:

The stagnant economy has brought no fluctuation in the GDP, but by decreasing the average interest rates as discussed, real Gross Domestic Product growth will occur. The spending from newly employed citizens will also help to increase the GDP through enlarging consumption and the profits of businesses could increase investments as well. With production expanding, more export spending could be created to ease the low purchasing power the Dracma has. The growth in GDP has no overt negatives, except the indirect effects of lowering interest rates for the government, which are inflation and deficit spending.