For this next discussion, you enroll yourself in a group.

This discussion requires you to discuss and

provide a solution to a contemporary economic problem such as the current inflation that we are
experiencing. As part of the President's team of economic advisors your team is discussing the following
two options: raising taxes (that is fiscal policy) or raising interest rates (monetary policy). Fiscal policy is
the responsibility of the administration and monetary policy is the responsibility of the Federal Reserve.

Discuss the pros and cons of each option. Be sure to address the economic impact of both options
(supported by theory and evidence).Your team should recommend an option that you decided will best
solve the current inflation problem. Your recommendation must be supported by economic theory. 15
points

Fiscal policy is the “responsibility of the administration” and refers to the use of government spending and
tax policies to influence macroeconomic conditions. ​The expansionary type of fiscal policy lowers tax
rates or increases spending to increase aggregate demand and in turn fuels economic growth. The
contractionary type of fiscal policy raises rates or cuts spending to thus prevent or reduce inflation. A list
of pros regarding fiscal policy are that it can keep businesses afloat when household spending on
consumer goods declines, can reduce unemployment and poverty with a strong stimulus program, and
spending on military projects or on infrastructure can produce positive benefits. A list of cons regarding
fiscal policy are that if the policy isn't automatic, it may take months to implement and years to have a
significant effect, stimulus spending can trigger inflation, where wages go up but prices rise and absorb
the extra money. In addition, debt will increase unsustainably and investors may start demanding steep
interest rates to provide any cash, as well as long-term stimulus spending can also crowd private
investment out of the market. In order for fiscal policy stimulus spending to occur as a benefit, the
government should adopt the four principles that the stimulus shouldn’t have a permanent effect on
deficits, the spending should be back to normal once conditions improve, the structural reforms that will
be made can boost growth significantly, and countries with demographic issues should adopt healthcare
strategies for dealing with a situation and factor that into their fiscal policy.

Source: https://www.investopedia.com/terms/f/fiscalpolicy.asp

Monetary policy serves to adjust the interest rates and money supply and is run by the Federal Open
Market (FOMC). Monetary Policy can be either expansionary or contractionary. Some pros of
expansionary Monetary Policy are: interest rates may fall, the economy can grow, and it can decrease
unemployment. For example, by increasing the money supply the Feds can lower interest rates which
makes it easier for people to borrow money which then boosts GDP, reduces unemployment and helps
raise the stock market. When inflation or hyperinflation threatens the economy, the Fed can tighten the
money supply to avoid that specific situation. Some cons of expansionary monetary policy is that inflation
may worsen and trade deficit may increase. Inflation may worsen as more money enters the circulation
then the value of each dollar might decrease. Contractionary monetary policy decreases the money
supply and increases the interest rate which decreases the amount of investments. Some pros of this
include: fighting inflation and trade deficit may decrease. Some disadvantages however risk recession,
increases unemployment, slows growth, and may cause interest rates to increase. For example, during
the COVID pandemic, short-term interest rates were reduced to zero to encourage growth and when that
failed, the FOMC “began buying $120 billion worth of bonds and mortgage-backed securities every
month.” These measures served to keep interest rates low and increase the money supply which helped
preserve the recession for two months. Therefore making expansionary monetary policy effective in
preventing a long-term recession or inflation.

Source: https://connectusfund.org/16-advantages-and-disadvantages-of-fiscal-and-monetary-policy