The economy has been suffering through a recession for over a year and the government is desperate for solutions. Elections are coming up and the current administration is in danger of being replaced if something isn’t done to stimulate the economy fast.
1. What types of fiscal policies can the government engage in to increase consumption? Why might these policies be ineffective? Why might increasing investment be a better target?
2. What will these policies do to the budget deficit and the national debt? Assuming the government borrows from domestic sources what impact will this borrowing have on the economy in the short run? In the long run?
3. How can the Federal Reserve use each of the three tools of monetary policy to fight inflation? How will these contractionary monetary policies (in theory) reduce aggregate demand?
4. Despite the best efforts of the Federal Reserve to reduce bank reserves, people keep borrowing. In fact, it seems like banks are actually lowering their interest rates. Why is this happening? How might a Monetarist propose to use the Federal Reserve to control inflation over the long-run?