A recession refers to a contraction in a business cycle that may result in an economic slowdown. In other words, a recession might signify a negative economic growth that happens in two consecutive quarters. On that note, the Macropoland government should employ a policy mix of both expansionary fiscal and monetary policies. These two policies will aim at stabilizing prices and increasing the money supply in the bid to stimulate economic growth.
The first policy that the Macropoland government should consider is the expansionary monetary policy. According to the basic principles of economics, expansionary monetary policies consist of options that work towards increasing or expanding the country’s money supply. In this case, the government should reduce discount rates charged to financial institutions for borrowing funds from the Feds. By so doing, central banks will purchase government securities, and therefore, facilitate the quantitative easing. This outcome can also be facilitated with the implementation of a reduced reserve ratio.
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"Fiscal and Monetary Policies".
Furthermore, the government should implement the main expansionary monetary policies, which include implementing a tax cut and increasing government spending. The implementation of these fiscal policies will help the government to increase the aggregate demand. In other words, expansionary fiscal policies are effective in filling the gap between economic activities and spending.
A policy mix of both expansionary monetary and fiscal policies will have two major outcomes: increased aggregate demand and expanded the money supply. Expanded money supply will lower interest rates, resulting in increased investments, as businesses will increase spending and production. Thus, the overall national income will gradually raise to facilitate spending. Furthermore, an increase in the aggregate demand will stimulate the economy by raising output and price levels, thereby improving consumption rates within affected households.
In conclusion, the implementation of both expansionary monetary and fiscal policies will improve the country’s overall money supply and aggregate demand respectively. An increase in money supply will revive consumption and investment, while increased aggregate demand will help to stimulate production and the labor market.
