Answer to Question #324310 in Macroeconomics for alli

Question

1.      As a policy adviser, explain how you would use the OMO to secure 3 -5% economic growth and reduce unemployment in an economy in slight recession? (5mks)

b. Describe possible unintended consequence to your policy actions. (3mks)

 

Answer 1

Through expansionary. Expansionary fiscal policy increases the level of aggregate demand, through either increases in government spending or reductions in taxes. Expansionary policy can do this by

(1) increasing consumption by raising disposable income through cuts in personal income taxes or payroll taxes; (2) increase investments by raising after-tax profits through cuts in business taxes; and

(3) increasing government purchases through increased spending by the federal government on final goods and services and raising federal grants to state and local governments to increase their expenditures on final goods and services.

Its effects are:

The injection of additional money into the economy increases inflation levels

The higher money supply reduces the value of the local currency.