Monetary policy works when the central bank reduces interest rates and makes credit more available. As a result, business investment and other types of spending increase, causing GDP and employment to grow. Expansionary monetary policy specifically is one that can help the economy return to a normal GDP. However, monetary policy is not immediate. If a recession occurred out of nowhere, monetary policy would not be able to help change it in a short month. Instead, monetary policy should balance out the business cycle.
Fiscal policy is the use of government spending and tax policy to influence the path of the economy over time. (Ch 17.4) In my opinion, fiscal policy would be the way to go. Specifically, expansionary fiscal policy would help. Expansionary fiscal policy cuts payroll taxes, business taxes, etc. This allows for increased consumption, increased investment spending, and increased government spending. Increased spending can result to higher GDP. Although, we all know from this class that GDP numbers can be deceiving.
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