1. Could fiscal policy (government) work in tandem with monetary policy (Fed) to prevent a crowding out effect from happening?

2. How does contractionary fiscal policy affect inflation?

3. Should we have used contractionary fiscal policy (a tough political choice, monetary is usually the option there) instead? Or given that there are so many possibilities of political issues or recognition lags, do we have the tools to intervene?

4. Explain a value added comment to the discussion below and pose any question

Fiscal policy affects the aggregate demand with changes in government spending and government taxation. This causes a rise in interest rates which effects household incomes and spending. This, in turn, reduces investments which is called "crowding out." Crowding out occurs when public spending effects and brings down private spending. When it comes to inflation, fiscal policy assists in trying to maintain or bring inflation down. An example of this is when taxes are raised and government spending is decreased. Persistent fiscal stimulus is when the economy is near or at full capacity. In the long run, this can lead to a rise in debt-to-GDP ratio. It can also lead to an unmanageable level of debt. Fiscal policy assists with managing the economy from its effect on the total amount of output that is produced. Fiscal policy raises the demand for goods and services, leading to increases with both pricing and output. The expansion of output involves increasing the money supply which increases pricing.

After reading these articles, I have a new understanding of fiscal policy. I did not realize that the government had two main tools that they use to either increase or decrease economic activity. I now understand how big of an impact fiscal policy has on our economy. It was a shock to read that the GDP for fiscal year 2020 was 14.9% since the COVID-19 pandemic! I knew that the pandemic hurt the U.S. in more ways than can be counted, but I did not realize that it caused a historic recession.

Reference(s):

Fiscal Policy: Economic Effects /https://fas.org/sgp/crs/misc/R45723.pdf

Fiscal Policy: Taking and Giving Away byMark Horton and Asmaa El-Ganainy -https://www.imf.org/external/pubs/ft/fandd/basics/fiscpol.htm