Do you agree with the premise of the article that monetary policy is a necessary

Question

Do you agree with the premise of the article that monetary policy is a necessary but not sufficient policy for stimulating aggregate demand in the US (and Western economies)? What changes in fiscal policy (if any) do you suggest. Explain.

Discuss how interest rates affect and Total quantity of money theory if it applies especially to the low interest rates.

HEY do not naturally crave the limelight.But for the past decade the attention on central only slowly and economies need succour now The most ur gent priority is to enlist fiscal policy Themain too! for fighting recessions has to shift from central banks to governments. bankers has been unblinkingTo anyone who remembers the 196os and i97os, that idea and increasingly hostile. During will seem both familiar and worrying Back then governments the financial crisis the Federal took it for granted that it was their responsibility to pepupde- Reserve and other central banks mand.The problem was that politicians were good at cutting were hailed for their actions: by taxes and increasing spending to boost the economy but hope slashing rates and printing money to buy bonds, they stopped lessatreversing course when such a boost was nolonger need- a shockfrom becoming a depression Now theirsignaturepoli ed. Fiscal stimulus became synonymous with an ever-bigger cy of keepinginterest rateslow oreven negative,is at the centre state. The task today is to find a form of fiscal policy thatcanre vive the economy in the bad times without entrenching gov of the biggest macroeconomic debate in ageneration. The central bankers say that ultra-loose monetary policy ernmentin the good. mains essential to prop up still-weak economies and hit theirThat means going beyond the standardresponse to calls for inflation targets. The Bankof Japan (Bo) this weekpromised to more public spending namely, infrastructure investment. To keep ten-year government bond yields around zero. On Sep- be clearspending on productive infrastructure is a good thing. tember 21st the Federal Reserve put off a rate rise yet again. In Much of the rich world could do with new toll roads,railways the wake of the Brexit vote, the Bank of England has cut its and airports, and it will never be cheaper to build them. To main policyrate to 0.25%,the lowest in its 300-yearhistory. manage the risk of white elephant projects, private sector partners should be involved from the start. Pension andinsur ance funds are desperate for long-lasting assets that willgener- But a growingchorus of eritics frets aboutthe effects of thelow ate the steady income they have promised to retirees. Special- rate world-a topsy-turvy place where savers are charged a fee, stpension fundscan adviseon aproject's merits,withone eye Come Yellen and high water where the yields on a large fraction of rich-world govemment on eventually buying the assets in question. debt come with a minus sign, and where central banks matter Butinfrastructure spending is not the best way to prop up more than markets in deciding how capital is allocated. Politi- weakdemand.Ambitious capital projects cannot beturnedon cians have wadedin. Donald Trump,the Republicanpresiden and off tofine-tune the economy. They are anightmare to plan. tial nomince, has accused Janet Yellen, the Fed's chairman, of take ages to deliver and risk becoming bogged down in poli keeping rates low for political reasons. Wolfgang Schauble, tics. To be effective as a countercyclical tool,fiscal policy must Germany's finance minister, blames the European Central mimic the best features of modern-day monetary policy. Bankfortherise of Aiternative for Germany, a right-wingparty. whereby independent central banks can act immediately to This is a debate on which both sides get a lot wrong,Itis too loosen or tighten as circumstancesrequire simple to say that central bankers are causing the lowrate worid; they are also reacting to it. Real long-term interest rates Small-government Keynesianism have been declining for decades, driven by fundamental fac- Politicians will not-and should not-hand over big budget de- tors such as ageing populations and theintegration of savings cisions to technocrats. Yet there are ways to make fiscal policy rich Chinainto the world economy (see pages z1-24). Nor have lesspoliticised and more responsive.Independent fiscal coun they been reckless. in most of the rich wold inflation is below cils, like Britain's Ofice for Budget Responsiblity,can help de the official target. Indeed, in some ways central banks have not politicise public-spending decisions, but they do nothing to been bold enough.Onlynow,for example,has the Boj explicit- speed up fiscal action. For that, more automaticity is needed. ly pledged to overshoot its 2% inflation target. The Fed still binding some spending to changes in the economic cycle The seemsanxious to push up rates as soon as it can duration and generosity of unempl could Yet the evidence is mounting that the distortions caused by linked to the overalljoblessness rate in the econony, for exam the low-rate world are growing even as the gains are diminish- ple. Sales taxes, income-tax deductions or tax free allowances ing. The pension-pian deficits of companies and local govern on saving could similarly vary in line with the state of the ments have ballooned because it costs more to honour future economy, using the unemployment rate as thelodestar pension promises when interest rates fall. Banks, which northis may seem unlikely to happen. Central banks have mally make money from the difference between short-term had totake on so much responsibility since the fnancial crisis and long-term rates, struggle when rates are flat or negative. because politicians have so far failed to shoulder theirs But That impairs their ability to make loans even to the creditwor- each new twist on ultra-loose monetary policy has less power thy Unendingly low rates have skewed financial markets, en and more drawbacks. When the next downturn comes, this suring a big sell-off if rates were suddenly to rise. The longer kind of fiscal ammunition will be desperately needed. Only a smali share of public spending needs to be aflected for fiscal To live safely in a low rate world,itis time to move beyonda policy to be an effective recession-fighting weapon. Rather reliance on centralbanks. Structural reforms to increase under than blaming central bankers for the lowrate world, it is time this goes on, the greater the perils that accumulate. ying growth rates have a vital role. But their effects materialise for govemments to help them.

Explanation / Answer

To reduce the recession prevailing in an economy, the government seeks to utilize its monetary measures for controlling it, as money supply in the economy is the most effective tool for seeing the functioning of the economic activities or functioning.. In such a situation in the US, the Government used its monetary tools and lowered the interest rates as well as printed money more and more to ignite the demand in the market for better conditions.

The results of such actions lead to:

- more inflationary conditions: with every citizen having lots of money to spend, there comes a situation where there is huge demand chasing too few goods. A situation where the supply is short and is unable to meet the demand which causes a rise in prices.

- high prices of goods: prices of all commodities start to increase significantly leading to inflationary conditions in the economy which is all the more difficult to control for the government.

- Irrelevant distribution of resources: the resources present in the economy are put to many irrelevant and not required business or uses, which could have n=been better extracted if used by experts or through a planned medium. All this happens due to easy low-interest rate available loans for entrepreneurs.

Changes in the fiscal policy that could be brought about by the government are:

- the government must make its policies and programs such that they seek towards enhancing the income levels of its citizens through working in the economy.

- policies made for reducing unemployment would make every individual work. The employment generation programs would lead to an absorbing of voluntary or involuntary unemployed citizens. And would accordingly increase their income and subsequently giving an effect to GDP and National Income.

- loans must be offered to only priority sectors at lower prices. Sucha need would demand good supervision and analysis.

The quantity of money in the economy defines the country's currency's value in the market. More the supply less is the value. And therefore if loans are offered to the public at low-interest rates, there would be more supply of money as every person would be sanctioned wit loans of low-interest rates.

And this leads to lowering the value of money in the domestic as well as international market.

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