Expansionary Economic Policy

1528 words 7 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
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Second, it increases the size of the deposit multiplier (Amacher & Pate, 2012). An increase in the reserve ratio works in the opposite way. The interest rate the Fed charges a bank is the discount rate (Amacher & Pate, 2012). The higher the rate, the less likely banks are to borrow. The discount rate acts more as a function than a tool in monetary policy. An increase in the discount rate indicates to banks that the Fed wants cool down the economy by reducing bank lending. An increase indicates the Fed’s desire to stimulate the economy. The Fed most likely would increase the discount rate when conducting monetary policy because by doing so, it would keep banks from using this source before turning to other less expensive alternatives. Whether or not the Fed wants to buy or sell government securities depends on this; whether or not they want the funds rate to rise or fall. If the fed wants the funds rate to fall, it will buy government securities from a bank. What happens is that the Fed then pays for securities by increasing the bank’s reserves (frbsf.org, 2011). The banks will then have more reserves than it wants. Then the Fed can lend these unwanted reserves to another bank. If the Fed wants the funds rate to rise, then the opposite will happen. It will sell the government securities. The fed receives payment in reserves from the banks, which will lower the supply of reserves in the banking system (frbsf.org, 2011). To tighten money and credit in the


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