MONETARY AND FISCAL POLICY

Monetary and Fiscal Policy Module 3 - Case

Monetary and Fiscal Policy Module 3 - Case

Introduction

This assignment answers the following four questions in order to display an understanding about the relationship between the supply of money and the Federal Reserve. It also aims to throw light on how the fiscal policy can stabilize the economy and create sound business environment within the economic structure. The answers in this assignment will be supported by case readings in order to reinforce our stance.

How is a recession defined? Is the U.S. currently in a recession? Explain.

Recession may be defined as a slowdown or contraction in the business cycle in which the economic activity of the country slows down to a minimum. Recession typically leads to a fall in the rates of production, employment and inflation along with many other factors. As a result, the Gross Domestic Product (GDP) of the country profoundly declines, and patterns of production and consumption are affected. The government responds to the situation by increasing the money supplies, increasing the spending of the government and reducing the current taxation rates of the country (Blinder, 2011). The potential impacts of recession vary from country to country, depending upon the fiscal policy and monetary stability of the country prior to the recession.

The subprime mortgage crises and the U.S. housing bubble have led to major crises for the U.S. economy in recent years. This is to support the normal belief that U.S. is undergoing strict recessionary period, marked by a slow growth in contraction, in its economic activity compared to earlier time (Amos. 2011). While inflation brings down in lieu of the recession, there are many things that are uncontrollable by the Fed including the prices of oil and food in the international markets. The latest statistics of gross domestic product (GDP) of the United States is a "distressing sign", with the decline in consumption of durable goods, residential investment in "free fall", and inventories that increase while the production is faced with declining sales. The increased investment in equipment and software, supposed to compensate for lower real estate costs and consumption, is quite diminishing (Rittenberg, Tregarthen, 2011).

While the Reserve can try to counter the impact of a recession by lowering interest rates, the recession in housing markets and consumption will dominate any monetary relief. The recession in the United States would extend the scope for monetary and tax relief, which was much more limited now than in 2001, when the Group of Seven industrialized countries reduced their interest rates and facilitated fiscal policy. There are now significant limitations to the relief money while global inflation is rising, and fiscal policy can be made easier because almost all the G7 countries face serious fiscal imbalances.

Assume you are an advisor to President Obama. What fiscal policy tools could be used to stimulate the economy? Be sure to review Obama's 2011 Budget Proposal (NY Times). Are there any areas that you would change?

President Obama's Budget Proposal was ...