The answer to each question should be a short to long paragraph. 1) What are the

Question

The answer to each question should be a short to long paragraph.

1) What are the advantages and disadvantages of using an expansionary monetary policy in a recession compared to using fiscal policy? (Please note: I am not asking you how monetary policy works. You have already answered it in part c above. The question is specifically about the advantages of monetary policy compared fiscal policy in a recession).

The answer to each question should be a short to long paragraph. What are the advantages and disadvantages of using an expansionary monetary policy in a recession compared to using fiscal policy? (Please note: I am not asking you how monetary policy works. You have already answered it in part c above. The question is specifically about the advantages of monetary policy compared fiscal policy in a recession). What are the advantages and disadvantages of using an expansionary fiscal policy in a recession (That is, compared to using monetary policy)?

Explanation / Answer

1. Expansionary monetary puts more money into circulation, which people can then spend. The more they spend the more robust the economy becomes, in theory. Expansionary monetary policy has two tools to put more money into circulation: lowering interest rates, and increasing money supply. Either way, liquidity increases. Banks have more money to lend, interest rates decline on mortgages, people borrow more and spend more. Companies hire workers to fulfill the demand, and the workers spend THEIR money. All around, things are supposed to get better. THis is the main advantage to expanding monetary policy. It is also quicker to maipulate monetary policy than fiscal policy, so as soon as signs are seen that there is a problem, the government can respond. This usually takes about 6 months because there is a lag. Using fiscal policy not only takes longer to put into effect, fiscal policy changes are systemic. THe government spends more money, and taxes are cut. people go back to work.

2. Cutting taxes, one of the chief tools of fiscal policy, is extremely popular. People feels like they are getting a "real deal" when taxes are cut. They go out and spend money. Having the popular support is one real advantage of this type of fiscal policy. Once the real GDP goes below its potential, we are in a recession and fiscal policy is utilized to increase aggregate demand. When demand increases, people are put back to work. The main disadvantages for fiscal policy is the long lag between the time the recession is spotted and the time the system can respond. It can also be very difficult to determine what the economic symptoms mean, even when they are observed. Because monetary policy is controlled by the Fed, who meets eight times a year, the response period is much quicker for fiscal policy.

Rittenberg, L. & Tregarthen, T. (2009) Principles of microeconomics. Chapters 11 and 12. Retrieved from http://www.web-books.com/eLibrary/NC/B0/B62/TOC.html

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