If your objective was to affect the economy in the short run what actions would you recommend? Why?
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If I were trying to affect the economy in the short run, I would use fiscal policy rather than monetary policy. The reason for this is that monetary policy takes longer to have an impact on the economy than fiscal policy does.
Fiscal policy consists of government decisions about taxation and government spending. If, for example, I wanted to stimulate the economy and get more economic activity going, I would increase government spending and/or I would cut taxes. I would do this to specific types of taxes and spending.
If I wanted to stimulate the economy immediately, I would cut taxes like payroll taxes. These are taxes that are taken out of people’s paychecks every time they are paid. If I cut those taxes, people would have more money right now instead of having to wait until the next year as they would if I cut income taxes.
If I wanted to stimulate the economy immediately, I would increase spending on “shovel-ready” projects. That is, I would pay for more projects that could be started immediately. I would not spend on projects that were going to require a long time for planning and implementation.
By taking these steps, I could hope to affect the economy quickly.
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