Paper

Elana Milligan

milligan.7@wright.edu

GM 545: Business Economics

Fall Term-B February 2012

After review of the scenario, I would advise the president to enforce an expansionary monetary and fiscal policy. Since the unemployment rate is at 8 percent, then that shall be the main focus that needs to be under control and move towards the 4 to 6 percent and operating at full employment. An expansionary fiscal policy will put more money into the hands of the consumers and businesses, with increasing government spending and decreasing taxes; also will spur unemployment rate to shift towards income equilibrium. Since inflation rates are decreasing, prices are falling which can allow for consumers to buy more with their income and businesses to invest. However with expansionary monetary policy, the economy can allow for prices and inflation to increase in the short run and return to back to price equilibrium and spread the drop of unemployment rate for several periods. I disagree with Kathy Lee with raising taxes and increasing government spending because this will not stimulate the economy and cause business to hire. I would agree with Allison Taney because in terms of raising the reserve ratio because this will affect inflation, and will lead to more equilibrium economy; with the Federal Reserve raising the reserve requirement, then we will have excess reserves and banks will have more money supply for loans for the open market. Also it will expand the aggregate demand with the availability of the money supply and increase in investment. Also I would consider the advice from Patricia Lopez since she also wants to increase the reserve requirement as well. In terms of the interest rates, I would agree with Raymond Burke with lowering interest rates to also cause a shock to the recession to stimulate the economy.