Purpose of Assignment This week requires the student to address six unresolved i

Question

Purpose of Assignment This week requires the student to address six unresolved issues in macroeconomics, each of which is central to current political debates. Students are required to use information and tools that they have accumulated in their study of the text and evaluate both sides of those issues, determine which side they can support for each issue, and defend their positions. Select two subjects from the following list of topics and write a 1,250-word analysis total, on both topics:

Active monetary and fiscal policy (Please include this as one of your two topics for this class!)

Increased government spending to fight recessions

Evaluate both the advocates' position and the critics' position. Determine which position you support and defend your position. Cite a minimum of three peer-reviewed sources not including your textbook. Format consistent with APA guidelines. Click the Assignment Files tab to submit your assignment.

Explanation / Answer

The governments & central banks around the world use different tools to spur economic growth in the right direction. The two most important tools they use is the fiscal & monetary policies. Central banks are responsible for implementing the monetary policy while fiscal policy is implemented by government. These are basically a set of actions which a central bank or government adopts in response to economic conditions. When these actions are taken according to the state of economy are called as active monetary or fiscal policy. Both fiscal & monetary policies have almost similar objectives like, to maintain economic growth, increase employment & controlling inflation.

Monetary policy:

In active monetary policy when a country’s economy grows in a rapid manner resulting in higher inflation levels central banks tighten the monetary policy by raising interest rates & reducing money supply which results in controlling inflation. If economy is in recession central banks will cut interest rates to decrease cost of borrowings & increase money supply to increase investments. It is easy to implement the monetary policy for central banks & it yields results quickly. If central banks devalue the currency it can boost exports as local products become cheap in international markets.

At the same time there are some negative aspects of these monetary policy.

If central banks sets interest too low, it can result in cheap over borrowing creating speculative bubbles. If demand is constant in low interest regime the value of money decrease causing goods more expensive. The effects of monetary policy are short termed. The effects can take a long time to materialize. Studies have suggested that monetary policy have better effects during expansion of economy compared to recession.

Fiscal policy:

In active fiscal policy if economy witnesses a fast paced growth government will raise taxes & cut its spending to control inflation & cool down economy. If economy is in recession government will decrease tax rates & increase its spending to boost economy & investment. Active fiscal policy gives government flexibility to direct its spending towards specific sectors & projects where it’s needed more. Governments also have flexibility to tax certain sectors more like industries with high pollution levels to reduce ill effects & also generate revenue. The effects of fiscal policy yield results faster & remain longer than monetary policy.

At the same time there are few shortcomings of fiscal policy mentioned below.

In active fiscal policy if government chooses to spend high amount & taxes are low for a longer duration, it can create budget deficits & if not controlled can go to dangerous levels. If government spends more on imports it results in outward flow of money instead of local circulation. If there is higher income tax or local taxes it reduces incentives to work. Businesses also dislike variable tax rates. If government choose to reduce spending it can lower investments & increase inequality.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.