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 ...view middle of the document...
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 economy more. I do not agree with buying bonds and raising interest rates because that will only reduce the money supply.
My recommendation to the President is to lower taxes, lower interest rates, and increase government spending. By lowering taxes, this will put more money into consumers’ pockets, which increases purchasing power. Assuming interest rates are not at zero, we should lower interest rates in order to get businesses and consumers to borrow money from banks. This will increase businesses’ capital, which grants businesses the financial stability to expand and to hire more people. Interest rates should not be so low that banks are not making any profits on return. Increasing government spending also puts more money into the hands of businesses and consumers. I would not want there to be too many dollars chasing too few goods. This would result in inflation. Right now, inflation is down. Somehow, we need to turn that around. Once consumers start buying again, the government will get more revenue through sales taxes. Hopefully, my recommendation will get consumers spending again to try to turn this economy around, but we have to gain back their confidence.