Reference no: EM133182911

1. The use of government policy in the economy is to keep law and order in the country and regulate all the money's. A typical way the government tries to influence countries is by adjusting the price of borrowing. The federal government guides the overall pace of all economic activity.

Due to the fact that the FED can execute monetary policy effectively, they can keep stability in their prices. The most appropriate time to use fiscal policy would be at a time when our country is in a recession. If inflation becomes too much we sould also use fiscal policy. Some specific tools used in monetary policy would include: interest rates, reserve equipment, and open market operations. As for fiscal policy, tools used to stimulate and stabalize would be: taxes and spending.

In my opinion and to conclude, I would say a combination of both monetary and fiscal policy is what I would use to stimulate aggregate demand. Each brings its own helpfulness at different times. Also both can influence the factors used to calculate it.

2. The economic crisis of the early 20s of the 1930s has affected both monetary and political reasoning. The results of this occasion ended up being of such an aspect that expansive agreement arose on states putting forth a valiant effort to keep such fiascos from reoccurring. In any case, even past this outrageous case, there is general arrangement that a steady and unsurprising monetary climate contributes considerably to social and financial government assistance. In the short-run, families like to have financial solidness with persistent business and stable livelihoods, permitting them to keep up with stable utilization over the long haul. Over the long haul, superfluous financial changes can lessen development, for instance by expanding the peril of speculations. A profoundly unpredictable monetary climate could likewise adversely affect the decision of schooling profiles and profession ways. So, by keeping a stable macroeconomic climate, financial arrangement can accordingly add to monetary development and government assistance.

1. When the economy is in a recessionary gap, a fiscal expansion (decrease in taxes, increase in government expenditure) can pull the economy out of this gap and bring the output back up to the full employment level. Or, a monetary expansion (increase in money supply) will have the same effect on the economy.

2. When the economy is facing a supply deficit and the output is lower than the potential level, and prices are high, an expansionary fiscal policy or monetary policy will increase the output but it will also further increase prices which will lead to high level of inflation in the economy. Hence, under this condition, a fiscal policy would be inappropriate to stabilize the economy.

3. In order to stimulate aggregate demand, the aim of the fiscal policy is to increase consumer expenditure. This can be done either by decreasing taxes which would lead to higher disposable incomes with the consumers and hence higher expenditure, or, this can be done by increasing government spending on infrastructure, consumer goods, healthcare, etc. which will also stimulate consumer expenditure.

4. An expansionary monetary policy involves increasing the money supply in an economy which leads to a lower rate of interest. At this lower rate of interest, borrowing becomes cheaper and this leads to an increase in private investment which stimulates aggregate demand.

5. Both fiscal and monetary policies are equally effective to stimulate AD and stabilize the economy. However, monetary policies are easier and more effective in terms of implementation and result achievement.