Essay Expansionary Economic Policy

1524 Words7 Pages
Expansionary Economic Policy
David Gors
ECO203: Principles of Macroeconomics
Nick Bergan
April 14, 2013

In economic terms, a recession is defined as a general slowdown in economic activity. In an effort to move the economy out of a recession, the government would implement expansionary economic policies. One action the government would take would include conducting expansionary fiscal policy. The other action taken would be conducting expansionary monetary policy. Both of these actions would have an effect on such things as money supply, interest rates, spending, aggregate demand, GDP, and employment. Expansionary fiscal policy consists of change in government expenditures, or taxes, in order in influence the level of economic
…show more content…
The most common tool used is the open market operations tool. This is used to buy or sell government bonds on the open market. It is used to manipulate the short term interest rate and the supply of base money in an economy. The discount rate is the interest rate a Reserve Bank charges eligible financial institutions to borrow funds on a short term basis (How the Fed Guides Monetary Policy, 2011). A higher discount rate can indicate a more restrictive policy, while a lower rate can be used to signal a more expansive policy (How the Fed Guides Monetary Policy, 2011). All financial institutions, whether or not they are members of the Federal Reserve System, must set aside a percentage of their deposits as reserves to be held either as cash or as reserve account balances. The Federal Reserve sets these requirements for all commercial banks, savings banks, savings and loans, credit unions, and U.S. branches and agencies of foreign banks (How the Fed Guides Monetary Policy, 2011). This tool is the least common used of the three. There are two kinds of assets that banks can count toward meeting the required reserve. The first is valued cash such as currency and coins. The second, and largest, consists of funds the bank has on deposit with its direct Reserve Bank (Amacher & Pate, 2012). A change in the reserve ratio is rarely made and when a change is made it usually is in small amounts. A reduction in the ratio usually
Get Access