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The country of Argonia has experienced an expansionary period with rapid growth for the past 10 years leading to their rGDP doubling during this time
The country of Argonia has experienced an expansionary period with rapid growth for the past 10 years leading to their rGDP doubling during this time. Recently there was a large earthquake that ended this phase and threw the country into a severe recession. Currently the rGDP has dropped by $10 million below the full employment level. The average inflation rate is 3%, the money multiplier is 4. the natural rate of unemployment is 6%, the current unemployment rate is 35%, and the government debt is 200% of rGDP. 1. Choose to act as either the Federal Reserve Bank or the Federal government and explain your choice. 2. Explain what actions you would take to fix the economy. (Be as specific as possible - including timeline, actual policy choices and calculations if applicable) 3. Explain how effective you expect your policy choices to be. What are the limitations of your agency's impact on the economy?
Expert Solution
. I would prefer to act as the Federal Reseve bank. The inflation rate is very minimal. The government is already having a debt ratio of 200%. The government is not in a position to accept an expansionary fiscal policy. The expansionary mnonetary policy is the better option to choose from.
2. I would choose an expansionary monetary policy. The inflation is less. The value of money multiplier is 4. Each dollar spend will create an impact of $4 in the economy. The money supply can be enhanced. This would further reduce the rate of interest and attract further private investment.
3. The monetary policy will be really effective to solve this crisis. A compensatory fiscal policy can be also used at a later stage.
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