Money Supply and the Federal Reserve

Fiscal policy is usually trying to stimulate the economy as much as is possible through such things as lowering taxes, spending on programs, and ignoring account deficits. Economic expert (economic expert , 2009) , describes recession as a reduction of a country’s Gross National Product in two successive quarters; a situation mostly caused by economic shocks and can culminate into economic depression if not mitigated first enough like the Great Depression of 1930s.

In case of recession therefore , the economy initially show signs of slowing resulting into fall in stock’s prices and resultant domino effect due to perceived “going bad” of loans on them (economic expert , 2009). As a chief loan officer, I would recommend to the Federal Government and the Federal Reserve to adopt policy strategies aimed at expanding government spending and cut taxes during recessions with an aim of increasing the aggregate demand.

My policy description therefore will be: Lowered taxes, increased government spending, and high interest rates. This can be shown graphically as: r P LRAS MS r2 SRAS r1 MD2 AD2 MD1 AD3 AD1 Quantity of Money YLR Y* Quantity of real output

The strategy would be effective since during recession revenue reduces coupled with reduced income which prompt increase money demand from MD1 to MD2 and increased interest rates. There will also be crease in government spending especially for unemployment insurance increase as employment declines increasing money supply, hence fall in taxation and increased aggregated demand shown by the shift from AD1 TO AD2. The increase in the money supply would therefore increase aggregate demand to combat a recession (netfiles.

uiuc. edu, 2008). At the same time; lower tax rates would spur investment due to prospects for higher returns resulting into increased employees’ compensation that promotes work and overall economic productivity (netfiles. uiuc. edu, 2008). As a local resident with a mortgage and car loans to repay, though with good credit status and has high chance of being laid off, I believe that my bank will assist me financially. P LRAS 1 SRAS 2 AD1 AD2 YLR Quantity of

Since there is high level of unemployment and low output growth during recession for most firms and the eventual monetary policy tools employed to increase money supply , my bank will apply this analysis based on my credit worthiness not only to ward me the loan but also follow the regulator’s directives of expansionary monetary policy. The action would increase money supply as shown by AD to offset the initial decline in AD. There will therefore be no major change in income hence a quicker recovery from the recession.

I can also acquire a mortgage backed security from my bank and use part of my savings and unemployment benefits to offset the loan. References Economic expert. (2009). Recession. Retrieved February 6, 2009. Available online: <http://www. economicexpert. com/a/Recession. html. > Netfiles. uiuc. edu. (2008). Effectiveness of Fiscal vs. Monetary Policy, 2008. Retrieved February 6, 2009. Available online: <https://netfiles. uiuc. edu/camara/econ103/fall08/reading07. pdf>