Outline a program of monetary and fiscal policies to reduce the level of unemployment in an economy. Use graphs, specifically IS-LM analysis.
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Unemployment is a state where the equilibrium settles below the maximum employment level of Gross Domestic Product (GDP). To reduce unemployment the GDP must be increased and to increase GDP spending must increase. The Federal Reserve Bank can control spending using three ways. The first way is for the Federal Reserve Bank (Fed) to purchase bonds in the open market to increase the money supply. The purchasing of bonds from the open market increases money supply because more money is provided to the people. Later it will be explained how an increase in money supply can increase spending thereby reducing unemployment. The second way is for the Fed to increase the proportion of total assets that banks must hold in reserve with the central bank. In this manner, the Fed can control a number of loanable funds. An increase in the total assets that banks must hold in reserve increases the loanable funds. The higher the loanable funds, the higher the money supply because it stimulates loans. The third way is for the Fed to decrease the discount rate. A decrease in discount rate increases loans and thereby increases the money supply.
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