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 at an average of 3% per year. It is important to have the right mix of policies and that all the variables be timed perfectly.
Assume that a country has a growing budget deficit, carries a very large debt, is in a period of high unemployment with interest rates almost at zero, and annual inflation and GDP growth of about 2%.
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? Why?
What is the first action you would take as the chairperson of the Fed? Why?
Make sure you include both the positive and negative effects of your actions, and include the trade-offs or opportunity costs.
Discuss the dangers of a high debt to GDP ratio and a growing budget deficit and how this affects your policy recommendations.
Your discussion should include the Phillips curve and the multiplier and at least three other of the following concepts:
Demand and supply of money
The Phillips curve
Costs of inflation
The multiplier and the tax multiplier
The idea of tax rebates to stimulate the economy