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The Federal Reserve left interest rates unchanged Wednesday and assured investors that there are no near-term plans to raise them. Both current Fed Chairman Powell

The Federal Reserve left interest rates unchanged Wednesday and assured investors that there are no near-term plans to raise them. Both current Fed Chairman Powell and newly appointed Treasury Secretary Janet Yellen have spoken out in favour of additional government spending as key to helping the economy recover, and to worry later about other policy issues such as inflation and the growing deficit. Powell said during the news conference that he expects a good working relationship with his predecessor.” (CNN Business, January 2021, “Fed dismisses worries about inflation and pledges to keep rates low.”) Besides conventional monetary policy, why is expansionary fiscal policy also used in face of large recessionary output gaps? Should fiscal and monetary policies be coordinated even in normal times? Why is that? In the Nordhaus’s model of policy coordination, if the monetary authority chooses to tolerate a relatively high inflation, how would the resulting equilibria be different from otherwise? Explain.

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Answer 1 Expansionary fiscal policy is used in the face of large recessionary output gaps because it is an effective way of boosting economic activity and stimulating growth Fiscal policy involves gov... blur-text-image

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