Expansionary Economic Policy Research Paper Example | Topics and Well Written Essays - 2000 words

Expansionary Economic Policy - Research Paper Example These tools moves the economy out of recession by affecting the money supply, interest rates, spending, aggregate demand, gross domestic product and employment. The goal of every economy is to operate at full employment equilibrium. The policy which can do the job of stabilising the equilibrium output to the full employment level is known as stabilisation policy. There are two types of stabilisation policy. They are fiscal policy and monetary policy. Fiscal policy refers to any change in ‘fisc’ which means treasury. In a broad sense the change in fisc is brought about by changes in the revenue -expenditure policy of the Fed. Summary of revenue and expenditure can be represented by the government budget. The budget has two elements : tax revenue (T) constituting the major source of government revenue and government expenditure (G). The monetary policy refers to any change in money supply brought about by the monetary authority. One of the most important way in which the monetary authority can affect the credit market is open market operations (OMO). In OMO the Fed makes sales and purchases of Government securities in open market . Another instrument of the monetary policy is the change in the required reserve ratio. The required reserves are the minimum balance that the Fed requires a bank to hold in the vault cash or on deposit with the Fed. The percentage of such deposits are called the required reserve ratio. The third instrument is the discount rate. Changes in the discount rate occur when The Fed changes the rate of interest on loans (Tucker,2008). In order to analyse the effects of fiscal and monetary undertaken by The Fed we consider commodity, money and labour