Question: During short-run fluctuations in economic activity, what can government policymakers (like Congress and the Federal Reserve) do to mitigate the effects of an economic downturn or inflation?
Here is a suggested outline for the response:
Describe the phases of the business cycle (expansion, contraction/recession)
What happens to GDP during a business cycle expansion? contraction?
What happens to unemployment during a business cycle expansion? contraction?
What happens to inflation during a business cycle expansion? contraction?
What tools are available to the Federal Reserve during a recession (expansionary monetary policy tools)? What tools are available to the Federal Reserve during an expansion with high inflation (contractionary monetary policy tools)?
Describe the three primary tools of the Federal Reserve discussed in class and how they’re used to increase or decrease the money supply.
Describe how the Federal Reserve increases or reduces the money supply using the banking system.
Explain how both the expansion of the money supply and the contraction of the money supply affects GDP, unemployment, and inflation.
What tools are available to the Congress during a recession (expansionary fiscal policy tools)? What tools are available to the Congress during an expansion with high inflation (contractionary fiscal policy tools)?
Describe the difference between automatic stabilizers and discretionary fiscal policy.
Describe which policies are expansionary fiscal policies and which policies are contractionary fiscal policies.
Explain how both the expansionary and contractionary fiscal policy affects GDP, unemployment, and inflation.
What are the arguments of supply side economists?
What should policymakers be focused on (long-run vs. short-run economic growth)?
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