What branches of Government are responsible for managing the economy, and why? W

Question

What branches of Government are responsible for managing the economy, and why?

What is the composition of the GDP and how to compare nominal versus real values?

How did Maynard Keynes propose to address the Great Depression? Did it differ from the Classical views? How does it compare to Monetarism?

How does the Federal Reserve System perform its functions and what instruments of policy does it use?

What were the business cycles and long-term trend of the economy from the 1960s to now, and the main factors behind its growth?

Explanation / Answer

1. Governments manage economy through two policy instruments - fiscal policy & monetary policy. Whereas the former is used regulate the expenditure & earnings of government, including taxes, the latter is used to regulate the money supply & level of interest rates.

Usually these two roles are performed by two different branches of government across most of the countries. Central banks are responsible for monetary policy and the legislative & executive arms of goverment are responsible for fiscal policy. The extent & distribution of powers may differ from country to country but essentially the role division runs the same.

The reason for separation of roles are:

1. These two policies have differing objectives and require specialized skills and powers.

2. It provides necessary checks & balances. For instance, an inefficient govenment may run huge fiscal deficits and if it is also managing the money supply then it may resort to deficit financing as a near term solution. Of course this may be disastrous for economy in the long run. Therefore, need for an independent and specialized agency to run monetary policy.

3. Taxation can be and should be levied by popularly elected governments who represent people and not technocrats. Likewise, regulating banks and managing inflation is tasked to central banks for their expertise.

4. Executive and legislatures elected by people are responsible for employment and welfare and would like to be seen doing that through fiscal policy policy. On the other hand, managing inflation might require unpopular decisions that may stifle growth and employment in the short term but are necessary. Therefore, all the more reason to have separation.

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