First, let’s look at the phases of the business cycle. The first phase is the expansion of the economy. This is the long term trends employment, output, and income. The second phase is the so called “overheating”, when we suffer from rising prices and interest rates, until it reaches a turning point a “peak” and turn downward into a recession. Recessions are usually a period of six to nine months and are filled with unemployment, falling output, income, prices, and interest rates. The third phase, the recovery phase, we will see rising employment, output, and income while unemployment will fall. First I will look at the Fiscal policy side. This is the changes in taxing and spending of the federal government for purposes of expanding or contracting the level of aggregate demand. An expansionary fiscal policy involves lowering taxes and increasing government spending. In a contractionary fiscal policy requires higher taxes and reduced spending. In my opinion a progressive income tax and higher increase in the welfare system and social security system would be two of the ways I would stimulate the economy. These are Automatic Stabilizers. I would spend more on job creation. In the Monetary policy side I would I would lower the interest rates and also allow people with lower credit score to apply for certain types of loans. I would entice more Americans to open businesses which in turn creates more jobs. We could also buy and sell bonds. We can also try and balance the budget to make a stronger dollar.
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