Macroeconomics: ECO 203
Professor Charles Aki
September 1, 2013
The US economy has seen some detrimental changes over the past decade. These changes resulted in unsubstantial unemployment rates, fluctuating interest rates, unstable GDP, and an increase in taxes. The federal government has an obligation to citizens to respond to the changes in the economy that affect each household. Expansionary Fiscal and Monetary Policies are economic policies used by the government to level out the extreme swings in our economy. The development state of US economy has forced the Federal Government to implement changes using their authority in Expansionary Fiscal and Monetary Policies in order to stabilize …show more content…
During a recession, automatic stabilizers kick in, like unemployment insurance and changes in tax codes.
Expansionary fiscal policy will lead to a higher output, but will lower the natural rate of output below what it would have been in the future. What is fortunate is that the benefits of expansionary fiscal policy are immediate, even though the government is not saving during this time. With expansionary economic policy, we are looking for immediate relief in the period of economic crisis.
The Federal Reserve (Fed) is responsible for all monetary policies. Expansionary Monetary Policy is a monetary policy in which an increase in the money supply and a reduction in interest rates are used to correct the problems in a recessed economy and is supported by the expansionary fiscal policy. The open market operations are the principal tool for expansionary monetary policy. Expansionary monetary policy process includes buying U.S. Treasury securities through open market, a decrease in the discount rate, and a decrease in reserve requirements. Basically, the purpose of expansionary monetary policy is to increase the quantity of money in circulation by reducing interest rates and providing more disposable income. (Turnovsky, 2004)
The open market operation is the buying and selling of U.S. Treasury securities as a way of controlling the money supply, bank reserves and interests rates. The open market operation is very effective and easy to