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Suggest how fiscal and monetary policy can move those numbers to an acceptable level keeping inflation the same.

Part 1: Assume that the country is in a period of high unemployment, interest rates are at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year.

  • Suggest how fiscal and monetary policy can move those numbers to an acceptable level keeping inflation the same.
  • What is the first action you would take as the president? As the chairman of the Fed? Why?
  • What would be your subsequent steps?
  • Make sure you include both the positive and negative effects of your actions, and include the trade-offs or opportunity costs.

Include the following concepts in your discussion:

  • Demand and supply of money
  • Interest rates
  • The Phillips curve
  • Taxation
  • Government spending
  • Wages
  • Costs of inflation
  • The multiplier and the tax multiplier
  • The idea of tax rebates to stimulate the economy

Part 2: Assume that the country is in a budget deficit and carrying a very large debt. Discuss the dangers of a high debt to GDP ratio and a growing budget deficit. Would this affect any policy changes you discussed in Part 1?


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