Monetary and Fiscal Policy In-Class Assignment:
Directions: Please write a (min.) one page, single spaced (handwritten) or double spaced (typed, 12pt font), report. Use the current information and the goals given to you in the scenario along with all of the tools available for monetary and fiscal policy in order to construct an economic plan for the U.S.A. The report needs to have a clear introduction and conclusion, it needs to be supported with graphs, and it needs to clearly define the channels along which the proposed policies will affect the U.S. economy. The graphs are needed as support for the report; they do not count as page space.
Scenario: You are tasked with "Saving America!" The U.S.A. is currently 20 trillion (more or less) in debt to the rest of the world. Current GDP is at 19 trillion with a growth rate of about 2%. Unemployment is doing rather well at 4.8% and inflation is hovering about the 1% mark, it is thought that the U.S. is near full employment. Your job is to reduce the deficit, keep unemployment low, and to keep inflation at around 2% while keeping everybody happy. The central bank has been conducting a contractionary policy thus far by raising the federal funds rate (through OMO) and has hinted at another rise in the interest rates in the future. The U.S. Government wants to increase taxes, and they want to fund major education and infrastructure projects, while keeping social services at about the same level it is at now (don't forget about "crowding out"). The U.S. is just now making its way out of a recession and the people of the country do not want to see it go back into another one.
Some suggestions:
1) Talk about the tools you have and how they will achieve your goals.
2) What happens to the different components of demand?
3) What happens to unemployment?
4) What happens to inflation?
5) What happens to the interest rate, real and nominal?
6) What happens to the exchange rate?
7) What happens to the trade balance?
9) What happens to expectations and the reliability of the FED?
8) What happens to GDP? Are we headed toward recession or expansion?
9) How will the U.S. be perceived by its citizens? By other nations?