Answer to Question #59181 in Macroeconomics for Junior
Following the recession years of 2007/2009, California faced a big drop in state taxes and responded with fiscal policies (it shut down state parks, increased tuition and fees in State and Community Colleges, laid off workers, and postponed projects). Some have argued that the State should have increased taxes on the rich and big business (fiscal policy). Others, have argued that the State should have sold bonds (monetary policy).
a. What do think would have been the best (of the three possibilities)?
As after the recession the state budget was exhausted. The economy required significant stimulation and the budget needed additional tax influx. Selling bonds is a way of increases money supply to the economy. Increasing taxes for rich people fills the budget gaps with a minima social pressure. Therefore both of these instruments are important for overcoming the recession. Beside of that the tools, which is used for “heating up” the economy, is the flexible inflation targeting;