Constant changes in market economies make it nearly impossible to maintain a constant level of economic activity. Fluctuations are the heart of market economies; market economies cannot exist without them. These fluctuations can be described as the business cycle, and like every cycle there are a series of events that construct these phases. The business cycle consists of three phases, expansion (until peak point is reached), a decreasing point into recession, and a rebound from recession to recovery. These events must be examined closely because it is possible for the economy to hit extreme highs and extreme lows which can abruptly change the flow of the cycle. For example, if overlooked and the economy hits an extreme low, considered a recession it would be extremely difficult for the economy to recover from this recession and would have to face severe consequences such as enormous debts. Consequences like these are the exact reasons why we have a governing body of the nation (government), whose job is to monitor the economy to produce sustainability and growth. In situations like these, the government implements and enforces certain policies that apply to specific situations and circumstances. Such policies guide the government into influencing and controlling the direction of activity through borrowing, spending, and taxes. Those policies are called economic policies, which are also implemented to control the total demand for final goods and services in the economy at a given time and price level (aggregate demand). There are two policies that specifically control aggregate demand and stimulate the economy, the fiscal and monetary policy. The fiscal policy pertains to taxing, “fiscal policy is changes in the taxing and s... ... middle of paper ... ...e goods market is impacted by the fiscal policy and the asset market is tied to the monetary policy. The question of which policy is more effective continues to be unanswered because different views will bring about different opinions of how effective is policy is and to what level of effectiveness it produces. Keynesians, which adopt the fiscal policy, and monetarist, are both in disagreement due to different assumptions. In the end what remains are the facts, “monetary policy has become more popular because fiscal policy can have more supply side effects on the wider economy, monetarists argue that expansionary fiscal policy is likely to cause crowding out, and monetary policy is quicker to implement than fiscal policy” (Difference Between Monetary and Fiscal Policy, economicshelp.org). In general, both fiscal and monetary policy help stimulate the economy.
The Classical economists believe that these are “temporary” changes that will correct themselves in the long run. They feel that an economy will always tend towards operating at its potential output (as given by the long-run aggregate supply curve. Nothing needs to be done by the government because normal market forces will serve to self-correct these issues. On the other hand, Keynesian economics argue that the gap between the lower and the potential levels of output is due to a change in aggregate demand. They argue that this gap can exist for a long time and that the gap can be pushed to close faster if the government enacts fiscal and monetary policies. There are differences in how each policy works to close the recessionary gap caused by a drop in aggregate
Two very important economic policies that point in different directions of fiscal policy include the Keynesian economics and Supply Side economics. They are opposites on the economic policy field and were introduced in the 20th century, but are known for their influence on the economy in the United States both were being used to try and help the economy during the Great Depression.
With America in recovery from the attacks on our freedom and our economy, many wonder if we will return to phase one (expansion) and how long it will take to reach phase two (recession) again. The Keynesian Theorists of America believe that the government should actively pursue Monetary policies (enacted by the Federal Reserve Bank) and Fiscal policies (enacted by Congress) to reach adjustments to price, employment, and growth levels. In our full market economy, we must use these economic policies to control aggregate demand. When these policies are used to stimulate the economy during a recession, it is said that the government is pursuing expansionary economic policies.
Everyone has their own political leaning and that leaning comes from one’s opinion about the Government. Peoples’ opinions are formed by what the parties say they will and will not do, the amounts they want spend and what they want to save. In macroeconomic terms, what the government spends is known as fiscal policy. Fiscal policy is the use of taxation and government spending for the purposes of stimulating or slowing down growth in an economy. Fiscal policy can be used for expansionary reasons, which is aimed at growing the economy and increasing employment, or contractionary which is intended to slow the growth of an economy. Expansionary fiscal policy features increased government spending and decreases in the tax rates as where contractionary policy focuses on lowering government spending and increasing tax rates. It must be understood that fiscal policy is meant to help the economy, although some negative results may arise.
The suggested fiscal policy to fix the issues of a trade-cycle recession is expansionary fiscal policy. This involves larger government purchases, a reduction in taxes, or an escalation in transfer payments. This fiscal policy substitute is intended to stimulate the economy by increasing aggregate expenditures and aggregate demand. It is primarily aimed at reducing unemployment, which is beneficial to the economy and the government.
Fiscal policy uses changes in taxes and government spending to affect overall spending and stabilize the economy. When lowering taxes the people have more to spend then the government decreases spending and the economy slows down therefore the economy stabilizes. The objective of fiscal policy is the governments’ typical use fiscal policy to promote strong and sustainable growth and reduce poverty. During periods of recession congress has the option to decrease taxes to give households more disposable income so they can buy more products. Therefore, lowering tax rates increases GDP.
Fiscal Policy involves the Government changing the levels of Taxation and Government Spending in order to influence AD (Aggregate Demand) and therefore the level of economic activity.
“The goal is an equilibrium level of national income that generates full employment with price stability”. (Amacher & Rate, 2012 pg. 9.2) During a recession, the government can use an expansionary fiscal policy to fill the recessionary gap, influencing the aggregate curve to the right. A recessionary gap happens when the economy is operating under full unemployment. When the economy is going through a recession; net exports, individual incomes, and investments will decrease affecting our GDP. President Barack Obama used an expansionary fiscal policy by enacting the Economics Stimulus Act during the Great Recession. If the government wants the opposite effect, it would implement a contractionary monetary policy, which slows down the economy. An economy is slowed down by reducing the money supply. The Federal Reserve contracts the money supply by selling bonds through market operations, meaning the public market. When bonds are sold, interest is collected by the central bank which has an effect on the price of goods and services (Inflation). The Federal Reserve can also affect the money supply by adjusting interest rates which will affect borrowing, consumption, and investments. If the Federal Reserve wants to expand the money supply it will purchase government bonds. This will cause interest rates to fall resulting in an increase in investments and borrowing
Monetary Policy is the changes in the quantity of money in circulation designed to alter interest rates and affect the level of overall spending. Fiscal policy is t...
Monetary policy is the mechanism of a country’s monetary authority (usually the central bank) controlling money in the economy so as to promote economic growth and stability by creating relatively stable prices and low unemployment. A monetary policy mainly deals with the supply of money, availability of money, cost of money and the rate of interest so as to attain a set of objectives aiming towards growth and stability of the economy.
The demand-side economics is based on a belief that the main force affecting overall economic activity and causing short-term decreases is consumer demand for goods and services. A reliable source describes, "At the core of demand side economics is the focus on aggregate demand. Aggregate demand is the combination of consumption of goods, industry investment in capital goods, government spending and net exports. When other elements of aggregate demand are weak, the government can mitigate their impact by increasing its spending. The government can intervene to generate demand for goods and services." The people who believe in the demand-side also believe that there should be high government during high recession points to overcome a short-term low aggregate demand. Increasing the aggregate demand will reduce unemployment and encourage economic activity, according to this theory. The government rises demand through spending on public goods and services as well as through its control of the money supply through changing interest rates or exchanging on government-issued
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
Economic policies, the foundations in which our country 's taxation and economy may be made or broken in a short or long run as a whole. There are many sides to the argument of economic policy, some on the side of the rich, others the poor, and some simply stand in a neutral position to help provide the best they can. The ideas of supply-side, demand-side, and monetary policies each have their own unique and individual strengths that have given many different advantages to the country over the years. However, they also are always at odds with each other over which policy works the best, how we can monetize the country, and how we can secure income and jobs for everyone. Through each of their individual merits each policy grants a purpose that
The economy tend to move from boom to recession, it is difficult for government to maintain and achieve macroeconomics objectives. At this time, there are “conflicts between government macroeconomic objectives”, which is this extended essay main theme. This essay will look at the government macroeconomic objectives, the conflicts between macroeconomics objectives, the best policy or mixture of policies to minimize the conflicts between macroeconomics objectives and recommendations, which are classified as main objectives and additional objectives.
The appropriate role of government in the economy consists of six major functions of interventions in the markets economy. Governments provide the legal and social framework, maintain competition, provide public goods and services, national defense, income and social welfare, correct for externalities, and stabilize the economy. The government also provides polices that help support the functioning of markets and policies to correct situations when the market fails. As well as, guiding the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. By applying the fiscal policy which adjusts spending and tax rates or monetary policy which manage the money supply and control the use of credit, it can slow down or speed up the economy's rate of growth in the process, affecting the level of prices and employment to increase or decrease.