Explain the economic policy that will stabilize the economy and achieve
Explanation of Solution
The role of the government and the central bank is necessary to stabilize the economy and achieve economic growth. If an economy faces recession, considering the role of the government, the government would adopt an expansionary fiscal policy to stimulate the economic activity. The tools of the expansionary fiscal policy are government spending and cut-down tax rate. Alternatively, if the economy faces inflation, the government would reduce lending and increase the tax rate. In case of the central bank, they adopt expansionary
Expansionary fiscal policy: Expansionary fiscal policy increases the government purchases and decreases the taxes to increase the aggregate demand and expanding output.
Contractionary fiscal policy: Contractionary fiscal policy is a fiscal policy of the government in which the government spending decreases and the tax increases.
Expansionary monetary policy: Expansionary monetary policy is a central bank policy that stimulates the economy by decreasing the interest rate, reducing the reserve requirement, and increasing the money supply.
Contractionary monetary policy: Contractionary monetary policy is a monetary policy that is implemented by the central bank to ensure price stability by targeting the interest rate, which is a reduction in the money supply and an increase in the interest rate.
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Economics Today and Tomorrow, Student EditionEconomicsISBN:9780078747663Author:McGraw-HillPublisher:Glencoe/McGraw-Hill School Pub Co