Answer to Question #113178 in Macroeconomics for Mariense21

Question

Which will the best monetary policy in the context of a Real Business Cycle model?

Answer 1

           Fiscal policy that increases the financial strength of people is deemed to be the best policy in the real business cycle. Tax reduction and increased government spending are considered as the best fiscal policy that touches every sector of the economy to increase the income of people. The reduction of various forms of tax has the impact of relieving taxpayers from higher budgets and thus encourages savings for even investments.Government spending also increases the supply of money in an economy and some government projects create employment.  Increased income results in increased demand and attracts more supply and as a result, production is encouraged. In other terms, lowering taxes increase the abilities of consumers to spend. This stimulates economic growth and through increased production, job creation can be increased in production industries that rise from increased supply. Real aggregate demand curve and real aggregate supply curve shift positively towards the right in favor of the real business cycle model whereby higher interest rates and an increase in output is realized