Two important policy goals of the government and the Fed are to keep unemployment and inflation low while at the same time making sure that GDP is increasing an average of 3% per year. It is important to have the right mix of policies and that all the variables be timed perfectly.
Part 1: Assume that the country is in a period of high unemployment, interest rates are at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year. Suggest how fiscal and monetary policy can move those numbers to an acceptable level keeping inflation the same. What is the first action you would take as the president? As the chairman of the Fed? Why? What would be your subsequent steps? Make sure you include both the positive and negative effects of your actions making sure you include the trade-offs or opportunity costs.
Include the following concepts in your discussion:
- Demand and supply of money
- Income and Productivity
- Interest rates
- Okun's law
- The Phillips curve
- Taxation
- Government spending
- Wages
- Aggregate supply
- Aggregate demand
- Long run and short run
- Costs of inflation
- The multiplier and the tax multiplier
- An open vs. a closed economy
- The idea of tax rebates to stimulate the economy
Part 2:Assume the country is in a budget deficit and carrying a very large debt. Discuss the dangers of a high debt to GDP ratio and a growing budget deficit. Would this change any policy changes you discussed in Part 1?
Part B
The financial crisis of 2008 has caused macroeconomists to rethink monetary and fiscal policies. Economists, financial experts, and government policy makers are victims of what former Fed chairman Alan Greenspan called a "once in a century credit tsunami"-in other words, nobody saw it coming.
Because you are now the expert in macroeconomics, your friends keep asking you your thoughts on what caused the financial crisis and whether the United States is going in the right or wrong direction with its current policies.
Focus specifically on the following:
- Monetary policy
- What monetary policies do you think caused the crisis?
- What were the effects of the policies implemented in reaction to the crisis?
- Do you think the solutions worked in the short term? In the long term?
- Fiscal policies
- What fiscal policies do you think caused the crisis?
- What were the effects of the fiscal policies implemented in reaction to the crisis?
- Do you think the solutions worked in the short term? In the long term?
Make sure you include the following concepts in your analysis:
- Interest rates
- GSAs
- The financial services industries (CDOs, CMOs, the stock market, credit flows, money markets, etc.)
- Tax rebates
- Aggregate demand
- Stimulus
- TARP
- Government debt and deficit
- Inflation
- Unemployment
- GDP
- Globalization
- Foreign investment
In your opinion, did government intervention help or harm the economy before and after the panic of 2008? Would you have done anything differently?
Make sure you use research to back up your argument.