Assignment
You are to continue using the same Fortune 500 company you selected in Unit 4. The focus here is on its domestic (American) operations, with global issues left for Unit 6. Begin by reading through the material on economic indicators in theWebliography. Select 6-10 indicators that are of particular relevance to your firm and explain why. Next, outline a strategy for how the firm should respond to the information provided by the economic indicators with the goal of maximizing revenues in the years ahead.
The Assignment is to be a minimum of five pages long (title pages, bibliographies, etc., do not count) and in APA format. A good variety of objective, high quality, current sources need to be used.
CASE STUDY
A country that has never had its own currency has formed a central bank and put you in charge of developing money. It needs to perform the necessary functions of any good currency efficiently (i.e., being a medium of exchange, a store of value, and a unit of account). Because your country is interested in trading with other members of the global economy, other nations must have faith in its fitness and the currency exchange markets must be willing to accept it. Though your answer needs to be correct in terms of economic theory (so be sure to read the assigned chapters), creativity and having fun with it is strongly encouraged.
1 Fiscal policy refers to the changes in government's choices regarding the overall level of government spending and taxes to affect the behavior of the economy. Fiscal policy can expand or contract aggregate demand. The government sometimes uses the fiscal policy instruments in an attempt to stabilize the economy. Under a recession, an expansionary fiscal policy is adopted, which involves lowering taxes and increasing government spending. In an overheated expansion with an inflationary pressure, a contractionary fiscal policy is utilized, which requires higher taxes and reduced spending. Economists and policymakers disagree about how active the government should be in these efforts.
Based on the above summary and the detailed descriptions of the issues in the textbook discuss any of the following set of questions:
1. What are the expansionary and contractionary fiscal policies? What are their policy instruments? How are they used to deal with the inflationary gap and recessionary gap?
2. What is the relationship between budget deficits and national (public) debt? Why has the USA national debt been increasing for decades?
3. Should the tax laws be reformed to encourage saving? Do you think consumption tax is better than income tax?
2 The Federal Reserve is responsible for regulating the U.S. monetary system and setting monetary policy. Monetary policy refers to what the Federal Reserve, the nation's central bank, does to influence the amount of money and credit in the U.S. economy. What happens to money and credit affects interest rates (the cost of credit) and the performance of the U.S. economy.
The Federal Reserve's three instruments of monetary policy are open market operations, the discount rate and reserve requirements. The Fed controls the money supply primarily through open-market operations. Accordingly, the purchase of government bonds increases the money supply, and the sale of government bonds decreases the money supply. The Fed can also expand the money supply by lowering reserve requirements or decreasing the discount rate. It can contract the money supply by raising reserve requirements or increasing the discount rate.
https://www.federalreserve.gov/
Based on the above summary and the detailed descriptions of the issues in the textbook discuss any of the following set of questions:
1. What are the expansionary monetary policy and contractionary monetary policy? What are their policy instruments? How are they used to deal with the inflationary gap and recessionary gap?
2. Do you think monetary policy or fiscal policy is likely to be the more effective tool of stabilization policy? Why?
3. If the Fed wants to increase aggregate demand, it can increase the money supply. If it does this, what happens to the interest rate and rate of inflation? Why might the Fed choose not to respond in this way?
4. Should monetary policy be made by rule rather than by discretion? Why?