What fiscal policies and monetary policies would be appropriate at this time?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The sorts of fiscal and monetary policies that would be appropriate at a given time depend on the macroeconomic situation that a country is in at that time.  Different macroeconomic situations call for different policies.  If you are asking about the United States, the most likely policies would be slightly expansionary ones that are meant to allow the economy to grow a little more rapidly than it is.

In general, when an economy is in a recession, a government should pursue expansionary policies.  It should enact monetary policies that are meant to increase the money supply.  These could include lowering interest rates, lowering reserve requirements (this is not commonly used), and buying government securities in open market operations.  All of these actions would put money into the economy and making borrowing easier, thus stimulating economic activity.  In fiscal policy, governments should lower taxes and/or increase spending.  This would put more money into the hands of consumers, allowing aggregate demand to increase.

When an economy is expanding too quickly, governments should try to “cool down” the economy.  It should pursue policies that are the opposite of those mentioned above.  It should raise interest rates and/or reserve requirements. It should sell government securities.  It should increase taxes and/or decrease spending. 

Right now, the United States economy is expanding.  However, it is not expanding too quickly and is, in fact, not expanding quickly enough in many people’s minds.  Therefore, many people would argue that the government should pursue policies that are meant to expand the economy gently.  In other words, if the government buys government securities, it should buy moderate amounts. (The Fed essentially cannot lower interest rates as they are very low already.)  If it increases spending, it should not do so drastically.  The US economy is not in a recession so the government should not take aggressive actions, but it is not in danger of overheating so the government should also refrain from taking steps that would cool the economy down.

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