When the economy is in a recession the federal government takes steps to move the economy out of the recession. Two of the actions they take are; the fiscal policy and the monetary policy. The fiscal policy causes necessary changes which leads to what they hope is a positive outcome. When the FED uses the monetary policy they use three tools to end the recession. In the end the hope is to move the economy out of the recession. This paper will go through what the necessary changes and the effects that the fiscal policy has; as well as the three tool of the monetary policy. Both policies play an important role in helping the economy get back on its feet so to speak. Expansionary Fiscal Policy is “A form of fiscal policy in which an increase in government purchases, a decrease in taxes, and/or an increase in transfer payments are used to correct the problems of a business-cycle contraction. The goal of expansionary fiscal policy is to close a recessionary gap, stimulate the economy, and decrease the unemployment rate,” (Web-pedia 1). When the government finds it necessary to use this policy there are necessary changes that need to be made to the taxes and government spending. Taxes are payments that the government takes from the economy in order to generate revenue. “Expansionary fiscal policy involves either a decrease of the income tax rates or a one-time rebate of taxes previously paid,” (Web-pedia 1). The decrees in taxes is usually preferred over raising government spending. When the government increases the spending the money goes to things that can be seen as important. These funds are spent to try to improve the economy. “About two-thirds of these funds were spent to produce or to purchase goods and services, such as defense, health care, highways, police, education, and courts,” (Amacher, R., Pate, J., 2012, CH. 9.3). The other one-third is put toward things like social security and welfare which have no exchange in goods and services. “The actual...
References: Amacher, R., Pate, J., (2012). Principles of Macroeconomics. San Diego, California: Bridgepoint Education, Inc.
Amose web, Web-pedia 1; http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=expansionary+fiscal+policy
Amose web, Web-pedia 2; http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=expansionary+monetary+policy
Amose web, Web-pedia 3; http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=discount+rate
Federal Reserve Bank of San Francisco, Dr. Econ, Aug 2001; http://www.frbsf.org/education/publications/doctor-econ/2001/august/reserve-requirements-ratio
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