Macropoland Economy Recovery Policy
Recession
The president of Macropoland has been worried because of the continued slowness of the economy of his country. The consumption levels of his country, as well as investment, declined in a short period, which reduces the Gross National Output of the country; this can be illustrated by the equation GNP = consumption + investment + government expenditure (Furtuoso et al., 2019). Another challenge facing the country is the high rate of unemployment at 9%. A low inflation rate accompanies the high rate of unemployment at 0.4%; therefore, the country is a recession.
As an economic advisor to Macropoland, I have the responsibility of coming up with the most suitable policies that can be used to stabilize the economy of the country. That is, the plan should be able to bring back the standard state of economic growth that includes a natural rate of unemployment, at a 2% rate of inflation. An economy such as that of Macropoland facing recession can be brought back to its normal state using various fiscal and monetary policy tools. The appropriate tools for stabilization of an economy in the recession are expansionary monetary tools and expansionary fiscal policy tools. The two policies will increase the amount of money in supply in the marketplace and enhance consumption as well as an investment that is necessary for the economic growth of a country.
Expansionary Monetary Policies
These are policies used by the central monetary authority of a country or the central bank to stimulate economic growth by increasing the amount of money in supply in the economy using different monetary policy tools. In the case of Macropoland, the following mechanisms of monetary policy can be used to remove the economy from the recession.
Open Market Operations
Using this expansionary monetary policy tool, the government of Macropoland should exchange treasury bonds from the public with money. This tool will ensure that the public has more money than they can invest as well as consume. Buying treasury bonds from the public will increase the amount of money in the hands of the people, which will consequently increase consumption and investments (Dinçer, Yüksel, & Adalı, 2019). Therefore, there will be economic growth characterized by the creation of job opportunities and an increased rate of inflation.
Interest Rate
The central bank of Macropoland, which regulates all the commercial banks and monetary institutions in the country, should reduce the interest rate at which the public can borrow money. A reduced interest rate will encourage more borrowing; therefore, the public will borrow enough money to increase investments and consumption (Gumata, & Ndou, 2017). People will be encouraged to borrow money from financial institutions to start businesses that create employment. Besides, more money in circulation in the economy means a higher rate of inflation.
Reserve Ratio
Reserve ratio is the lowest amount of money that a commercial bank is allowed to keep in its bank reserve. Macro-poland should have its commercial banks set lower reserve ratios so that they can have more money to lend to the public. This surplus translates into more money for the public to invest and create job opportunities. Therefore, there will be increased consumption and inflation as well.
Expansionary Fiscal Policies
This is the use of government spending and tax to modify the economy. Discussed hereunder are various tools under this policy that the government of Macropoland should consider to stabilize her economy.
Tax Reduction
Macropoland should reduce all taxes, including corporate tax, income tax, as well as capital gains. This tool is a crucial step in tackling the recession by shifting aggregate demand outwards. Consequently, production will increase to meet the increasing consumption. It would further enhance economic growth by encouraging investment in creating employment. However, the increase in demand helps producers to raise prices, which increase inflation.
Increased Government Expenditure
By implementing increased payment for programs such as social security, medical insurance, public investments, and other forms of government spending, Macropoland will provide the public with more money to spend. Aggregate demand will increase, which attracts investors (Polat, & Polat, 2019). Besides, Macropoland should carry out development projects such as the construction of roads. Such infrastructure facilitates trade by making transportation of goods more comfortable and more efficient. Therefore, there would be more jobs created which stimulate economic growth.
Conclusion
The government of Macropoland has a critical role to play in ensuring economic growth for its country by creating employment opportunities and realize the desired GDP. The president should take a keen look into the discussed matter to rescue the economy.
References
Dinçer, H., Yüksel, S., & Adalı, Z. (2019). Determining the Effects of Monetary Policies on Capital Markets of the Emerging Economies: An Evidence from E7 Countries. The Impacts of Monetary Policy in the 21st Century: Perspectives from Emerging Economies, Emerald Publishing Limited, 3-16.
Furtuoso, M. C. O., de Camargo Barros, G. S., & Guilhoto, J. J. M. (2019). THE GROSS NATIONAL PRODUCT OF THE BRAZILIAN AGROINDUSTRIAL COMPLEX. Revista de Economia e Sociologia Rural, 36(3), 123-144.
Gumata, N., & Ndou, E. (2017). Does Inflation Neutralise the Multiplier Effects of Expansionary Monetary and Fiscal Policy on GDP Growth?. In Labour Market and Fiscal Policy Adjustments to Shocks (pp. 581-590). Palgrave Macmillan, Cham.
Polat, G. E., & Polat, O. (2019). A Discussion on Fiscal Policies Implemented in EU During and After the Great Recession. In Global Challenges in Public Finance and International Relations (pp. 143-159). IGI Global.