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Eco203 Week 5 Final Essay

1232 words - 5 pages

Expansionary Economic Policy

In order to get the economy out of recession, federal government would engage in expansionary economic policies including expansionary fiscal policy and expansionary monitory policy. Under each of expansionary economic policies require different actions taken by the government. The subject study is aimed to conceptualize the concept of expansionary fiscal and monitory policies and to identify different actions and activities that a federal government may take under expansionary fiscal and monitory policies in order to take an economy out of recession (Larch, and Martins, 2009). Additionally order to identify and explain ...view middle of the document...

Actions Carried under Expansionary Monetary Policy:
The Federal Reserve Bank has numerous tools employed in order to expand the supply of money in the market(Sullivanet. al., 2003). In this regards the first tool is Federal Fund Rate. The Fed Fund Rate refers to the rate that banks charge from each other for overnight deposits. Additionally central bank requires the banks to maintain certain amount of deposits sin reserve at their local Federal Reserve Branch every night. In this regards banks having excess amount lend to those having balance less than reserve required at the end of day. The Fed drops the reserve ratio or rate it would become cheaper for banks to maintain their reserves, giving them more money to lend. As a result the banks may lower the interest rates they are charging from their customers.
Second tool the Central Banks may use include Open Market Operations. Under this the central banks buys the Treasury Notes or Mortgage-Backed Securities from its member banks. This pumps more money into the banks and therefore they would lend more. This is also known as Quantitative Easing(Heyneet. al., 2002). Third and final tool in this regards include lower down Discount Rate. Banks usually use their discount window very rarely due to the fact that there is Sigma attached. The Fed is considered to be lender of last resort. Therefore the banks use discount rate window when they are unable to get loan from any other bank(Larch, and Martins, 2009).
Dealing with interest rates under expansionary monitory policy the monetary authorities in different nations have differing in their level of control of economy-wide interest rates. In the United States, the Federal Reserve can set the discount rate, as well as achieve the desired federal funds rate by open market operations (Barry, 1992). These rates have significant effect on other market interest rates, but there is no perfect relationship. In the United States open market operations are a relatively small part of the total volume in the bond market.
Expansionary Fiscal Policy:
The expansionary fiscal policy usually involves the government spending exceeding tax revenues and therefore is undertaken usually during recession of economy. Therefore the government usually uses the expansionary fiscal policy to stimulate the economy and in order to create more growth(Barry, 1992). This is more critical and useful in contraction phase of business cycle in the case when voters are clamoring for relied from recession (Sullivanet. al., 2003).
Under the expansionary fiscal policy government either increases its spending or cuts the taxes or both if it can. The basic aims in this regards is that the government tries to increase money into hand of consumers in order to make them for spending more. This would increase the demand and therefore keeps the...

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