MACRO ECONOMICS
QUESTIONS:
1. Explicitly define both fiscal and monetary policy.
2. Compare and contrast the way Keynes and Friedman approach the economy. What are their key differences and similarities?
3. The following are five current or historical government actions dealing with macro-economic policy. For each scenario determine if it represents fiscal policy or monetary policy, and explain your answer.
a. President Obama has proposed a budget for the next year and the House of Representatives has proposed their own budget that has major differences with the President’s.
b. When President Clinton was in office during the 1990’s there was an intentional policy of reducing interest rates, both short and long-term.
c. Beginning with the Bush administration and continuing with the Obama administration there was a bailout of the financial system.
d. To avoid a stalemate with Congress that could have prevented any new legislation from being passed, the President and Congress, in December 2010, reached an agreement on extending the Bush era tax cuts for an additional two years.
e. Paul Volker was chairman of the Federal Reserve System in the late 1970’s and through most of the 1980’s. In the late 1970’s and into the early 80’s the United States was experiencing high inflation, reaching double digits of 10% and more. To reduce the inflation rate Mr. Volker dramatically increased interest rates to slow down the economy, and this plunged the US into a steep recession.
4. You have learned that Keynes and Friedman sharply differed on some basic ideas of how the Federal government should conduct economic policy. Which of the two economists do you agree with more, and explain why.
Strategies are implemented and adopted by governments to keep their respective economies relevant. One of methods adopted is fiscal policy where states incorporate their respective spending power against the turnover from taxation and borrowing to influence growth and competitive levels of gross domestic product (New School, n.d). On the other hand, monetary policy is determined by strategies geared towards monitoring and regulating the supply of money with major evidence presented by use of an independent financial institution as the regulatory body (New School, n.d).
The theory on fiscal policy was facilitated by the late John Keynes, which is regarded as the Keynesian theory. Monetary policy on the other hand, is a concept of the late Nobel Laureate Friedman Milton. Both personalities have similarities related to their theories approach as well as variations. One of the notable similarity points at enhancing states adoption of an economic strategy influenced by maintaining production means by private establishments and also enabling respective states make their economic decisions, on employment, taxes, currency value and expenditure. Further, policies in relation to financial decisions could determine the growth of economy, free of inflation and with incorporation of government derivatives in terms of control (Fullwiler, 2007). On the contrary, Friedman believed in regulated supply of money by central institution to deal with inflation and deflation situations; hence curb the spending power and maintain stability and growth of economy. Keynes believed in governments’ involvement in economic plans and implementation such as level of taxes, employment and spending (Tcherneva, 2010).
Both economists have influenced many governments especially in the recovery from war related deficits through the Keynesian theory. Though Friedman’s theory is important as Keynes’, it has impact on governments that want to deal with levels of either inflation or deflation with standards monitored by a regulatory body to maintain quality of money.
The ability of heads of states to adopt policies in matters connected to economy of their states is related to fiscal policy. Governments and presidents can formulate, policies and actions in relation to economic growth and its stability, level of taxes and the creation of employment, and of course, the integration of the government representatives and selected independent body to back such a proposal.
When an intention is geared towards affecting the price on borrowing money, the policy of money quality is determined, regardless of long or short term perspective. Therefore, the policy proposed by President Clinton represented a monetary policy. Interest rate are regulated by an autonomous body mandated by the government to oversee the rate of currency exchanges, hence determine the level of offshore currencies against relevance of domestic currency, to curb the probability of liabilities in other financial institution and overall economy (Becher, Jensen & Mercer, 2008).
Bail out has different perspectives related to the directed intention. In Bush and Obama’s administrations bailout to the financial system represents both fiscal and monetary strategies. In fiscal situation, the government can take the initiative to support the system by offering support in terms of money to aid recovery. On the other hand, the money used in the act is obtained from the major specific institution such as the United States Federal Reverse System, which will determine the rates at which the amount provided for bailout will be cleared. Federal Reverse System is mandated by the government to deal with monetary issues in the country and the economy. However, the approach by Mr. Volker in reference to inflation rate reduction is a decision made by the independent body with disregards of the government, hence the recession period and government intervention with bailouts.
Authority over taxes is the mandate of the government, the decision on extending tax cut period is a fiscal approach. The solution intended by this move is related to the situation in a country mostly presented by recession in economy and levels of unemployment (Fullwiler, 2007).
Based on the two theories, I agree with Keynes approach toward economics, as it relates to long term benefit which can enhance consistency with application of monetary counterpart when situations arise within respective economies. The choice is based on the sustainability of other goals created by states to improve on various sectors in terms of economy, jobs creation and maintenance of economic status consistency. More so, governments are more influenced in economic decisions such that employment, which is a factor of economic growth, has more advantage in Keynesian theory. The power bestowed on states enables them to make amendments on policies directed to development of growth especially in employment –oriented programs and taxes on the opposite of privatization strategy which affects wages and scarcity of labour (Rose, 2010).
In conclusion, both theories can be implemented in development of economy with governments’ regulatory power exceedingly significant to maintain a consistent economy in growth in all aspects connected to it in terms of employment, spending levels, and in collaboration with turnover. In addition, collaborating with an autonomous body to maintain currency performance, spending power and interest rates.
REFERENCES
Becher, D. A., Jensen, G. R., & Mercer, J. M. (2008). Monetary Policy Indicators as Predictors of Stocks Return. Journal of Financial Research, 31(4), 357-379. Retrieved from EBSCOhost.
Fullwiler, S. T. (2007). Interest Rates and Fiscal Sustainability. Journal of Economic Issues (Association for Evolutionary Economics), 41(4), 1003-1042. Retrieved from EBSCOhost.
New school. The Theory of Macroeconomic Policy – The New School. Retrieved from
http://cepa.newschool.edu/het/profiles/keynes.htm
Rose, S. (2010). Institutions and Fiscal Sustainability. National Tax Journal, 63(4), 807-837. Retrieved from EBSCOhost.
Tcherneva, P. R. (2010). Fiscal Policy: The Wrench in the New Economic Consensus. International Journal of Political Economy, 39(3), 24-44. Retrieved from EBSCOhost.
