Question

Scenario C

The media report that an “epidemic of the jobless” has emerged. Major corporations and small businesses alike are laying off workers. People are out of work in record numbers and struggling to find jobs. Some admit that they have given up looking. Housing foreclosures are increasing, while banks say they lack the funds to approve new loan applications or to adjust existing loans. Requests for unemployment, housing, and nutrition assistance are at record highs. Charity organizations are not receiving enough donations to meet the growing need in their communities. Credit card companies say the average debt balance is climbing while repayments are falling behind

Would the Fed address the scenario with expansionary or contractionary policy? Explain.
What is a specific monetary action the Fed might use in this scenario? Identify the tool and how the Fed would use it. Explain how this would address the scenario.

What is a specific fiscal action that Congress might use in this ?
scenario?

Answer 1

In response to high unemployment and economic downturn, the Federal Reserve would use expansionary monetary policy by lowering interest rates to stimulate economic activity, while Congress might increase government spending or cut taxes as part of expansionary fiscal policy to boost the economy.

Step-by-step explanation:

Given the scenario of an 'epidemic of the jobless' with rising unemployment and economic hardship, the Federal Reserve (Fed) would likely implement an expansionary monetary policy. The goal of such a policy is to stimulate economic growth by increasing the money supply and lowering interest rates, which helps to boost investment and consumer spending.

A specific monetary action the Fed might take is to lower the federal funds rate, which is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight. Reducing this rate would decrease the cost of borrowing, encouraging banks to lend more and businesses and consumers to take loans, which in turn should help to stimulate economic activity and reduce unemployment.

Concurrently, Congress might use fiscal policy to address the situation. A specific fiscal action could be to lower taxes or to increase government spending, both of which put more money in the hands of consumers and can lead to increased demand for goods and services, helping to grow the economy and decrease unemployment.