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Explain what would be the most effective policy for U.S. economy right now in 2019 (fiscal...

Explain what would be the most effective policy for U.S. economy right now in 2019 (fiscal and monetary). Now, if the economy is in a recession, analyze the role of using fiscal and monetary policy to help stabilize the economy.
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Answer #1

Following are basic information about the US economy:

  • Growth rate is above the 2 %
  • Inflation rate is close to 2 % or around inflation targeting.
  • Unemployment rate: 3.9 % ( natural rate of unemployment is 4 %)
  • Government debt 108 % of GDP.

Above data shows that US economy is entering phase of boom or it is performing well and government needs to rethink on monetary and fiscal policies. Now government and central bank would have to go for tight fiscal and monetary policies respectively.

But if economy faces recession, then expansionary fiscal and monetary policies would be undertaken. Fed will increase money supply thereby pulling down interest rate and government will increase expenditure to drive up aggregate demand.

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