You Decide

You Decide – Monetary and Fiscal Policy – Scenario Summary

Business Economics GM545

Fall Session B 2009

After consulting with Raymond Burke, economic consultant, I believe lowering interest rates is a great suggestion because it will help stimulate the economy; however, the President does not have any control over the monetary policy, so the Federal Reserve Bank (Fed) would have to make that decision. Even though lowering interest rates affect the economy slowly, this process allows companies to restructure their debt, raise capital to increase productivity and expand. Businesses will start hiring again, which will decrease the unemployment rate, and consumers will start spending again.

I disagree with Kathy Lee’s recommendation to raise taxes. If we raise taxes, money will be withdrawn from the economy’s spending stream. Instead of raising taxes, I feel we could raise the maximum income ceiling on FICA. Raising taxes, especially sales taxes, will halt consumer spending, which will cause consumers to spend only when necessary. Instead of reducing government spending, we should raise the backend age of eligibility for individuals qualifying for Social Security.

I agree with Patricia Lopez, the consultant to the Federal Reserve, that the Fed should leave interest rates alone. I agree that selling bonds will increase our money supply; however, I do not agree with selling bonds because that will increase our debt. Even though banks will be more stable if we raise the bank reserve requirement, I believe we should not raise it because that will decrease the opportunity for banks to lend reserves to one another in the Federal Funds Market. That bank cannot earn interest, which will reflect changes in the market demand and supply of excess reserves.

As recommended by Allison Tanney, increasing government spending and lowering taxes should put more money in the hands of businesses and consumers. If they choose to save their money, this will hurt the...