Economics: Private and Public Choice (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
Question
Chapter 15, Problem 1CQ
To determine

Explain the economic policy that will stabilize the economy and achieve economic growth.

Expert Solution & Answer
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Explanation of Solution

The role of the government and the central bank is necessary to stabilize the economy and achieve economic growth. If an economy faces recession, considering the role of the government, the government would adopt an expansionary fiscal policy to stimulate the economic activity. The tools of the expansionary fiscal policy are government spending and cut-down tax rate. Alternatively, if the economy faces inflation, the government would reduce lending and increase the tax rate. In case of the central bank, they adopt expansionary monetary policy during recession and contractionary monetary policy during inflation. The monetary tools are purchase and sale of bonds and stocks in the open market, decrease and increase in the interest rate, and decrease and increase in the reserve requirements. Therefore, during the period of recession, the expansionary fiscal policy and expansionary monetary policy will be suggested to stabilize and increase the growth of the economy and in inflation, a contractionary fiscal policy and contractionary monetary policy will stabilize the economy and achieve economic growth.

Economics Concept Introduction

Expansionary fiscal policy: Expansionary fiscal policy increases the government purchases and decreases the taxes to increase the aggregate demand and expanding output.

Contractionary fiscal policy: Contractionary fiscal policy is a fiscal policy of the government in which the government spending decreases and the tax increases. 

Expansionary monetary policy: Expansionary monetary policy is a central bank policy that stimulates the economy by decreasing the interest rate, reducing the reserve requirement, and increasing the money supply.

Contractionary monetary policy: Contractionary monetary policy is a monetary policy that is implemented by the central bank to ensure price stability by targeting the interest rate, which is a reduction in the money supply and an increase in the interest rate.

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