Fical Policy vs. Monetary Policy

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Fiscal Policy vs. Monetary Policy Rolinda Thomas Professor Hiltsje van Dijk Ecconomics 221 25 November 2009 Outline I. Introduction II. Business Cycle A. Description of the business cycle B. Phases of the business cycle III. Economics policy and the business cycle IV. Fiscal policy and Monetary policy A. Fiscal Policy i. Expansionary ii. Contractionary B. Monetary Policy i. Expansionary ii. Contractionary V. Conclusion A. Effectiveness of Fiscal Policy and Monetary policy FISCAL POLICY VS MONETARY POLICY The goal of macroeconomics is to stabilize price levels, have low unemployment, and economic growth. In order to attain these goals, governments use policies to influence the economy. These policies are the fiscal and monetary policies that are incorporated into the business cycle. Market economies have regular fluctuations in the level of economic activity which we call the business cycle. The business cycle as has four phases, as demonstrated in figure 1 below. The first phase is expansion when the economy is growing along its long term trends in employment, output, and income. Eventually the economy will overheat, and experience a rise in prices and interest rates, until it reaches a turning point called the peak, phase two. It will then turn downward into a recession which is the third phase of the cycle. Recessions are usually marked by falling employment, output, income, prices, and interest rates. Most importantly, recessions are marked by rising unemployment. The economy will hit a bottom point in the third phase called a trough and bounce back into the fourth phase, a recovery. The recovery is noticeable by rising employment, output, and income while unemployment will fall. The recovery will gradually slow down as the economy once again assumes its long term growth trends, and the
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