Question

With the current economic indicators (an increase in GDP from Q1 of $21.10 trillion to Q2 of $21.34 trillion, a fall in unemployment from 4.0% in January 2019 to 3.7% in July 2019, a CPI of +0.1%, and Inflation) in the U.S., which of the two should be implemented: Fiscal and Monetary Policy.

Areas to consider: should taxes be lowered, raised, or left the same? Should government spending be cut, increased, or stay the same? What contractionary or expansionary monetary policy would be recommended for the Federal Reserve to undertake? Should the Fed sell bonds or buy bonds? Or perhaps the Fed should change the discount rate?

Answer 1

These data shows that economy is operating above the full employment. Or there is overutilization of resources. unemployment rate has decreased even below the natural rate of unemployment.

Thus, prices might rise further, if government does not restraint the aggregate demand.

Both monetary policy and fiscal policies must be followed ease down demand pressure gradually.

Fiscal policy: government expenditure must be reduced and taxes must be raised. These measure would bring down aggregate demand.

Monetary policy: Contractionary monetary policy must be pursued. Reduce money supply would increase the interest rate. so demand pressure must ease down.

Federal Reserve would sell bond in open market. it will reduce money supply. Further, discount rate would also be raised. it will reduce the lending capacity of banks.