Developing Recession with Rising Unemployment
The economy as we know it today is developing a recession with rising unemployment. The US economy has experienced a decrease in real output for one quarter and leading indicators point to continued contraction in the current quarter. The unemployment rate last month was 5.8% and is expected to rise above 6% in the current quarter. With strict discipline, we can utilize fiscal or monetary policy tools in order to bring this nation back to an equilibrium state of mind. I will recommend in detail form how we can either use an expansionary fiscal policy or an expansionary monetary policy in order to achieve equilibrium. Either or, to bring this economy out of recession, an expansion of real GDP needs to occur to close this recessionary gap.
First, we look at expansionary fiscal policy. The Federal government has at its discretion a number of tools available. An increase in government spending(G) and a decrease in taxes, ceteris paribus, will shift the demand curve rightward pushing the economy out of recession. With a decrease in taxes, an increase in disposable income(Yd) occurs, which in turn increases both consumers marginal propensity to consume and marginal propensity to save. An increase of MPC means more money is being spent in the economy increasing the demand for goods and services. An increase in consumption(C), investment(I), government spending(G), and net exports(Nx) will raise the overall level of economic activity, increasing aggregate demand and shifting the aggregate demand curve to the right. By shifting the aggregate demand curve to the right, we increase real output bringing the economy out of recession into full employment and equilibrium.
Next, we will look at expansionary monetary policy tools the Federal Reserve System occupy to pull the economy out of a recessionary gap. The main policy tool the Fed utilizes is buying of government securities(bonds) on the open market to...
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