Suppose the economy is experiencing a recession. The output gap is hovering at −7%, causing higher than normal unemployment. Using the Fed model, complete the following passages to compare and contrast how monetary policy and fiscal policy can impact the economy. a. The Federal Reserve can reduce the to stimulate greater output and employment. The federal government can increase to help ease the recession. b. If both monetary and fiscal policy are used, the MP curve will shift , and the IS curve will shift to the . Both shifts will increase , and t

a. The Federal Reserve can reduce the interest rates to stimulate greater output and employment. The federal government can increase government spending to help ease the recession.

The Fed can reduce interest rates by engaging in expansionary monetary policy that would then make it easier to borrow funds for investment. The Federal government can also increase spending as this will put more money into the economy to help it start moving again.

b. If both monetary and fiscal policy are used, the MP curve will shift downward, and the IS curve will shift to the right. Both shifts will increase income.

If both monetary and fiscal policy are used, companies will start producing again and hiring more people which will shift the Marginal Productivity curve downward. The IS curve will also shift to the right and both to these are indicators of an increase in income.