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    Policy Options For The Economy

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    What are the two policy options used to influence the economy?

    In the current economy, we observe the following.
    Inflation rate 9.20
    Interest rate 10.60
    Growth in Real GDP -0.51
    Unemployment Rate 6.80

    a. Determine the monetary policy action and its consequences
    b. Determine the fiscal policy actions and its consequences.
    c. What are the possible negative side effects of your recommendations.

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    Solution Preview

    The two policy options are monetary policy and fiscal policy.

    The economy is in a recession, with a negative growth rate and a high unemployment rate. The inflation rate is also high, although not at a hyperinflationary level.

    a) Monetary policy attempts to influence the economy by changing the money supply. In this economy, the central bank will note that ...

    Solution Summary

    Given data for an economy's inflation rate, interest rate, GDP and unemployment rate, this solution shows how to determine the appropriate monetary policy and fiscal policy, and their possible negative consequences.