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.
Throughout Eveline Adomait and Richard Maranta’s Dinner Party Economics there is continuous discussion surrounding the problems that economies face around the world and the various methods that can be used to alter the state of the current economic conditions. Changes in consumer spending patterns can become a problem for the economy as a whole, potentially resulting in over-inflation or recession. Implementing discretionary policies such as monetary policy through changing interest rates, and fiscal policy through taxation and government spending, makes it possible to fix these economic problems.
Keynesianism and monetarism are both ways to stabilize the economy and promote growth when need. In keynesianism, government uses fiscal policy which is a list of policies that government spending and taxing can be used to improve the performance of an economy. The government produces stabilization by taxing and spending yearly plans. Taxing can occur when inflation is high and lowering taxes tends to occur during a high percentage of unemployment. By lowering taxes, it increases disposable income or the party of income that goes to financial responsibilities. When people have more money, they are able to spend more which in return goes into jump starting the economy. Monetary Policy is another policy used in Keynesianism which is a list of protocol designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system also known as the central banking system in the U.S. which holds control of this policy. Monetary policy has three tools used my the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rank a bank will charge. The f...
The Federal Reserve and Macroeconomic Factors Introduction The Federal Reserve controls the economy of the United States through a variety of tools. They use these tools to shape the monetary policy of the United States in order to promote economic growth and reduce the rate of inflation and the unemployment rate. By adjusting these tools, the Fed is able to control the amount of money in the supply. By controlling the amount of money, the Fed can affect the macro-economic indicators and steer the economy away from runaway inflation or a recession.
..., monetary and fiscal policy will work in different ways. People aren’t stupid and they aren’t super intelligent; they are people. If the government uses an activist monetary and fiscal policy in a predictable way, people will eventually come to build that expectation into their behavior. If the government bases its prediction of the effect of policy on past experience, that prediction will likely be wrong. But government never knows when expectations will change.
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
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).
The reduction of government role in the economy will affect fiscal policy by decreasing deficit spending a...
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
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.
After analyzing the data and the theory, we have provided our conclusion weather tax cut is better for the stimulation of growth or Government spending is? This report explains the big macroeconomic debates of the present times. It seeks to explore the debate within fiscal policy itself between tax cuts and government spending. We have tried to explain the argument through some theories and through some data collected from Indian econ...
The famous literature on principles of taxation was embodied in Adams Smith “Canons of taxation”. Since then, economies have adopted (and adapted where necessary) these basic principles for what is regarded as the most important tool of fiscal policy.
Whereas Milton Friedman argued that consumption is related to permanent rather than current income. He was therefore more sceptical about he usefulness of a tax change for stabilisation purposes than one who believes that consumption depends on current disposable income. Policy makers usually use Fiscal policy to alter the level, timing or composition of government expenditure and/or the level, timing or structure of tax payments. And they use Monetary policy to alter the supply of money and/or credit and also to alter interest rates. But some policies are not always successful; a good example was the decision to use monetary policy to solve the liquidity trap.
=== A study of economics in terms of whole systems especially with reference to general levels of output and income and to the interrelations among sectors of the economy is called macroeconomics. Macroeconomics is concerned with the behavior of the economy as a whole—with booms and recessions, the economy’s total output of goods and services and the growth of output, the rates of inflation and unemployment, the balance of payments, and exchange rates. Macroeconomics deals with the increase in output and employment over long period of time—that is economic growth—and with the short-run fluctuations that constitutes the business cycle. Macroeconomics focuses on the economic behavior and policies that effect consumption and investment, trade balance, the determinants of changes in wages and prices, monetary and fiscal policies, the money stock, the federal budget, interest rates, and national debt. In brief, macroeconomics deals with the major economic issues and problems of the day.
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.
These two policies use to try to shorten recessions. Fiscal policy has its initial impact in the goods markets, then monetary policy has its initial impact mainly in the assets markets, which both effect on both level of output and interest rates. (R. Dornbusch et al., 2008)