In expansionary fiscal policy, the government increases its spending and reduces taxes to increase the money supply in the market. This has a direct effect on unemployment and inflation, as in the result of increased public money, businesses gain strength due to increased overall consumption ultimately leads to the reduction in the unemployment rate. However, if the government continues to supply money at an excessively large rate, it can give rise to inflation and debt overheating as well. This is what exactly was explained by Smialek (2021) in her article published in New York Times while discussing the federal policies to combat the ongoing unemployment in the United States.
In 2020, the government’s efforts to contain COVID-19 heavily impacted all kinds of businesses that ultimately slowed down economic activity, and increasing the unemployment rate to the highest level since the Great Depression. In response, the federal government is now expecting a fast rebound through spending packages, unchanged tax rates, and growth-friendly central bank policies. Moreover, as the writer mentioned, the new government is ambitious to provide another $1.9 trillion spending package in addition to a $2 trillion relief package of March 2020 that will push the unemployment rate to 4.5 percent at the end of this year. The central bank will also keep the interest rate near zero and buy bonds of $120 billion. However, this increased spending can lead to inflation in the long term as some analysts have warned, but considering the low rates of inflation for decades, it is a very promising step to increase the money supply in the market to achieve the expected 3.5 percent unemployment rate as being too cautious at this time can also have adverse effects in future. This is also the fundamental desire of many policymakers, as the writer has mentioned, which I think is justified considering its overall positive impact on the economy.
Smialek, J. (2021, January 18). How Full Employment Became Washington’s Creed. The New York Times. https://www.nytimes.com/2021/01/18/business/economy/full-unemployment-fiscal-policy.html