Question

Major Debates Over Macroeconomic Policy Instructions Assignment Files Grading 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. Assignment Steps Select two subjects from the following list of topics and write a 1,050-word analysis: . Active monetary and fiscal policy Increased government spending to fight recessions * Reducing federal government's discretionary powers ·Zero-inflation target * Balanced government budget ·Tax incentives for saving 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.

Answer 1

An increased in government spending to fight recessions

Advocates:

An increased in government spending to fight recessions is based on number of issues. A recessionary gap originates that a recession lowers the aggregate demand. Due to which the government increase their spending with an aim to directly increase the aggregate demand curve. This happens mainly due to the people assumptions that government spending increases demand for goods and services which increases the demand for private sector investment which becomes a developing factors. According to Keynesian economist he has emphasized more on higher government spending to help recover from a recession. When there is fall in investment would lead to lower interest rates; this fall in interest rate would reduce the saving . If there is an increase in investment which in turn lead to a equilibrium of full employment. If saving is high then consumer spending will be low. Due to recession there will be lower profits, so they cut back on investment.

Critics:

The economist believes that the government should not impart a monetary/fiscal policy during the time of recession. Many economists argued that government intervention results to postponement of financial and operational restructuring and could lead morals hazards. The critics thought that the effects of such move would have a poor effects on the economy. And if the government runs based on the low grade information, the effect will be that aggregate demand will increase and economy will grow too fast thus causing inflation in the long run. The other consequences would be that the increased government spending causes the increase in the budget deficit which leads to higher taxation in the long run. Government revenue also automatically decreases. When the country takes an economic downturn, there is always a chance of unemployment. As a result more people aid for unemployment and other welfare measures, which increases government spending and aggregate demand. The people who are unemployed pay less taxes because the source of earning is debarred, which in turn decreases government spending. This result is an increase in federal deficit.

Similarly, the budget deficit tends to decrease during booms, which pulls back on aggregate demand. During booms period the earning power increases . Henceforth the government are able to collect more taxes. There is less chance of requirement of social needs during boom, government spending also decreases. As spending decreases, aggregate demand decreases which leads to reduce the size of the fluctuation in a country’s GDP. When recession last for longer time there is always a chance of liquidity trap i.e; people won’t borrow even though the product are cheap. A low-interest rate also make banks unprofitable which reduces the lending power. A major criticism that it invariably leads to the growth of the state, and higher inefficient, corrupt spending. The government end up spending money on projects which creates vested interests and after the recession proves impossible to cut back. Some economists argue that people look to the future and see a tax cut as only temporary, and therefore don’t spend. Instead, they save the tax cut in anticipation of future tax rises. If government spending is zero, presumably there will be very little economic growth.

Conclusion: I would support the Keynesians principles that policymakers should be prepared to reduce government spending once the economy recovered in order to prevent inflation, which would result from too much economic growth. In recession, Keynes advocated government borrowing to provide an injection of demand into the economy.

Active monetary and fiscal policy:

Many economists feel that both monetary and fiscal policy are really important in order to reduce the severity of business cycles. The major outcome of monetary policy is that how to implement as no legislative policy is required. The Federal government can put forth FOMC (Federal Open Market Committee). The can take a conclusive decisions. First of all, they should make sure that banks are not insolvent they should continue to make loans and encourage people to continue borrowing and to continue spending. And many believe that without these kinds of measures taken by our Federal Reserve System, we could have been headed for another Great Depression. So they feel that monetary policy was really, really crucial in their actions here.

First of all it doesn’t take long to implement monetary policy. For instance if I intends to purchase a house, Just because the interest rates are falling as this depicts a interest sensitive due to aggregate demand.

Since monetary policy is working mainly through these interest rates and the money supply, there can be a really significant lag between the time they put it in place, and the time when consumers or businesses start altering their behaviors. So because of this lag and because we can't predict a recession ahead of time, monetary policy generally cannot prevent a recession from happening. There is perhaps a issues of predictions. When monetary policy change the investment decisions which we take while say purchasing a house with a predictions that it's going to be a profitable one. And often that profitability has to deal with things like current interest rates. And so all of a sudden, when someone has made an investment decision that is going to reach for years and years and years, now their decision might not actually turn out to be a profitable one.

So because of this, there are some kind of major issues with the predictability component. First of all, unlike monetary policy, which like I was explaining to you before, takes time to see the intended effects, fiscal policy is going to be a little bit quicker here. It can encourage a pretty quick increase or decrease in aggregate demand.It doesn't work through interest rates, For instance says government cuts taxes, and I get an additional $50 in my next salary So I immediately spend it rather than making a investment. So the government can see pretty quickly whether their policy is going to work or not. Along with the Federal Reserve, the government took a lot of actions to ensure that the recession following that housing crisis did not result in an even lengthier depression. So they did take measures to cut taxes, and there were a lot of stimulus programs.

So unlike the Federal Reserve, though fiscal policy does have to go through the legislative process. So it's quick on the back end of it, to see the intended effect, but the process to put in place can really be held up through this political process. Because it can be really influenced by politics, obviously. So it can involve a huge time lag in implementation, as political parties are debating and arguing and it can get nasty. So it can be subject to special interests. And by the time fiscal policy is decided, then it can actually be too late.

Here's another thing to consider. In order to finance expansionary fiscal policy, the government generally has to borrow money. To stimulate aggregate demand the economists have criticized attempts to achieve long run economic growth by stimulating aggregate demand, when we're already at long run aggregate supply. As prices rise, they rise also for suppliers. So suppliers can end up decreasing their ability to produce.

So short run aggregate supply shifts right back to the left. During 1970 and 80s the government used expansionary policy to lower the unemployment rate.We know that with lower employment, we can expect higher inflation, and vice versa. As we lower inflation, unemployment tends to go up. So critics of this model point to the time when our economy experienced very high rates of inflation at the same time as high unemployment, which is known as stag inflation. So why didn't expansionary fiscal policies work to lower the unemployment rate. Well critics suggest the problem was not low demand, but instead, it was a supply shock. There were disruptions to our supply of oil, which caused our long run aggregate supply to shift to the last. It lowered the sustainable amount our economy could produce. And that caused our economy to enter the recession. Since the problem wasn't with aggregate demand, just stimulating aggregate demand through expansionary policy, did absolutely nothing to alleviate the supply shock, and it just caused inflation. If use Government spending, which can direct spending towards areas in need like infrastructure, education, etc. and make investments for the future. Using a balanced budget can provide a stimulus without adding to the government budget deficit. Fiscal policy may lead to government deficits/debt, we should emphasize more on debt/GDP ratio. As only as GDP grows, it can bring down the debt/GDP ratio. Whereas in case of Expansionary policy leading to depreciating currency can stimulate exports for the business which does not much rely on imports and last but not the least there is no government budget deficits.