Chapter 36, Problem 2FRQ

a)

To determine

The type of policy is used to address a recession

Explanation of Solution

When an economy is in a recession and produces less than its potential GDP, then expansionary fiscal policy is most suitable because contractionary policy is responsible for reductions in public expenditure and increases in taxation, that lower the amount of aggregate demand.

And, when monetary policy has lowered interest rates to zero, expansionary fiscal policy can significantly change the trajectory of the economy by increasing output, increasing resource use which address the situation of recession in economy.

Economics Concept Introduction

Introduction: The government of a nation implements fiscal policy through spending and taxes to affect the economic climate of the country. The monetary policy is used to control the supply of money in an economy to achieve the targeted economic growth.

b)

To determine

What change in government spending would address recession: an increase or a decrease

Explanation of Solution

In order to increase demand and the economy during a recession, the government may lower tax rates or increase spending. On the other side, it can slow the economy in order to fight inflation by raising rates or reducing spending.

Fiscal policy may seek to reduce taxes and boost federal expenditure to increase aggregate demand in order to assist combat a recession.

Economics Concept Introduction

Introduction: The monetary policy is used to control the supply of money in an economy to achieve the targeted economic growth. The government of a nation implements fiscal policy through spending and taxes to affect the economic climate of the country.

c)

To determine

Whether the Federal Reserve buy or sell bonds to address a recession

Explanation of Solution

The Fed typically purchases short-term government bonds during a recession, which lowers short-term interest rates.

By exchanging newly issued bank credit or buying debt securities on the open market, the Fed can cut interest rates. The banks that the Fed purchases reserves from are then able to lend money to one another at a lower fed funds rate, which is the rate at which banks lend to one another overnight.

Economics Concept Introduction

Introduction: The monetary policy is used to control the supply of money in an economy to achieve the targeted economic growth. The government of a nation implements fiscal policy through spending and taxes to affect the economic climate of the country.

Due to the current economic crisis, the Federal Reserve could lower interest rates.

d)

To determine

Whether the expansionary fiscal policy effective in fighting recessions

Explanation of Solution

Yes, the expansionary fiscal policy is highly effective to fight with recession in economy because this policy is used to expand the economy by increasing aggregate demand, which in turn results in the increase of output and lower unemployment rate.

This policy is used to fix recessions as in order to prevent or terminate a recession or depression, this policy entails raising expenditure or lowering taxes

Economics Concept Introduction

Introduction: The monetary policy is used to control the supply of money in an economy to achieve the targeted economic growth. The government of a nation implements fiscal policy through spending and taxes to affect the economic climate of the country.