Description
The week three assignment has been slightly modified. In this assignment you should display your understanding of the banking system and how the Federal Reserve controls the quantity of money. Please read and pay careful attention to how the quantity of money affects inflation and interest rates
in the long run, and production and employment in the short run.
This assignment will require you to analyze the impact of a variety of government policies on an economy. Please be sure to use applicable real world examples (Industries, businesses, and current events) in your paper.
Your paper will consists of the following key topics (anticipated word count 1200-1600):
1) Discuss how government policies can influence economic growth.
2) Analyze how monetary policy could influence the long-run behavior
of price levels, inflation rates, costs, and other real or nominal variables.
Use a minimum of three peer-reviewed sources from the University
Library.
Format your paper consistent with APA guidelines.
Explanation & Answer
Complete/ Please go through the paper and let me know if its okay. There is an outline and a complete paper. Download them both and submit the complete paper.
Running head: REAL ECONOMY
1
The Real Economy in the Long Run
Name
Instructor
Course
Date
REAL ECONOMY
2
1) Discuss how government policies can influence economic growth.
The policies and the activities of the government can influence the long term growth of the
economy. By transforming the short-term activities, the growth in the long-term can be enhanced
(Afonso & Furceri, 2010). When the industry or economy experiences uphill in their economic
growth the government execute policies that would ensure that there is proper balance within the
economy. The policies the government can apply to control inflation and influence the growth of
the economy is the fiscal policy, investment, and the monetary policy.
Monetary Policy
The policies of the government can influence the growth of the economy in various ways.
One of the ways the government can use to control inflation and influence economic growth is
monetary policies. The government can use monetary policy to control inflation and the supply of
money through altering the interest rates (Checherita-Westphal, & Rother, 2012). When the
economy growing very first and their hyperinflation the government through the central bank can
raise the rates of interest to lower the money supply and discourage spending within the economy.
When there is an excess supply of money within the economy, the rate of inflation is likely to rise
as there will be too much money chasing after few goods. This leads to increase of the prices of
goods and services (Afonso & Furceri, 2010). The government can reduce the supply of money by
increasing the interest rates. Through the central bank, the government can increase the interest
rates of the commercial banks and other financial institutions, therefore, making borrowing
expensive. Few individuals are therefore able to acquire loans thus reducing the circulation of
money within the economy hence reduce the rate of inflation. When the government wants to
encourage spending within the economy and encourage the growth of the economy, the
REAL ECONOMY
3
government will lower the interest rates through the central bank. When the central bank order the
commercial banks and other financial institutions to lower their interest rates, acquiring loan
become cheaper (Checherita-Westphal, & Rother, 2012). This, therefore, goes without saying that
reducing the interest rates increases the supply in the economy thus increase spending as well as
economic growth.
Fiscal Policy
Another policy which the government can use to control inflation and influence the economic
growth is the fiscal policy. Changing the government taxation and spending surely influences the
aggregate consumer demand (Afonso & Furceri, 2010). When the government wants to increase
aggregate demand in the economy that leads to economic growth, it will lower taxes and increase
the government spending. When the government needs to reduce the aggregate consumer
demand, it will increase taxes and reduce the government spending within the economy. The
Fiscal policy can boost or increase demand by reducing taxes that make production cheaper
(Checherita-Westphal, & Rother, 2012). With cheap cost of production, the prices of goods and
services shall be low therefore encouraging personal spending as well as government spending.
In case the government reduces income taxes, the disposable income will certainly increase thus
encouraging consumer spending. In the situation where the government spending is high, more
jobs opportunities shall be created and this will essentially lead to increase of the economic
growth (Checherita-Westphal, & Rother, 2012). The challenge of fiscal policy is the fact that it
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