Grade 8C IGCSE
_________________________________Penabur International- Jakarta________________
The macroeconomic objectives of a government can prove difficult to achieve all at once. In some cases policy aims might conflict. For example, some policy measures to reduce unemployment and boost economic growth may result in higher rates of price inflation.
- 5.1.4: Discuss up to what extent do you agree that fiscal and monetary policy instruments are like double edge sword if not used wisely may prove more harmful for a country.
Last date for Submission:
May 18th, 2014
Please Write Your Response in 750 Words
Note:
Marks allocation for this article is 20.
Rubrics for Marks.
A. Theoretical Explanation 5 Marks
B. References. 5 Marks [Use Harvard referencing style]
C. Use of Key words. 5 Marks
D. Evidences in the support of explanations 5 Marks
Fiscal policies are related to the central government, state or provincial and districts. They include public expenditure, public revenue, public debt and public borrowing. Monetary policies are related to the central bank or reserve bank and autonomous organizations which are responsible for parliament. Monetary policies involve interest rates, bank rate, CRR (Cash Reserve Ratio), SLR (Statuary Liquidity Ratio) and reppo rate.
ReplyDeleteExpansionary fiscal policies can achieve several government objectives through its policies. The first achieved objective is high and stable employment. In order to increase aggregate demand, government reduces taxes and increase public expenditure. Cutting taxes on profits may increase output and investments and cutting taxes on personal incomes may encourage workforce and increase labour productivity. The second achieved objective is high and sustainable economic growth rate. Through the objective of increasing aggregate demand will increase output and income as well as national income. This may simple increases economic growth rate and sustains the development of an economy. The third achieved objective is balanced international trade. This means exports or inflow of a country increases. However, expansionary fiscal policies might cause problem such as inflation. This is because as taxes are reduced, people may simply use this extra money to spend on imported goods and services. When inflation occurs, per capita income decreases, as well as real income. Also as aggregate demand falls, production will decrease and then result in increasing unemployment.
Contractionary fiscal policies can achieve one of the government objectives which is low and stable inflation. This is done by reducing aggregate demand, through a reduction in public expenditure and raising taxes. As taxes are increased, public expenditure will fall as well as disposable income and consumer expenditure. For that matter, inflow and outflow of a country can be controlled because consumers now spend less imported goods and services. However, contractionary fiscal policies cause problems which are unemployment as well as lower output and inflation if it is not controlled well. The impact of higher taxes and lower public spending may also fall heavily on people with low incomes, especially if welfare benefits to people who are unemployed or on low incomes are cut back.
There are problems regarding fiscal policy and the overuse of fiscal policy has contributed to these conditions. The first problem is that fiscal policy is cumbersome to use. It is difficult for the government to exactly estimate how much taxes, interest rates and money to be used in using the policy instruments to achieve government objectives. The second problem is public spending causes private spending crowding out. Public spending is by the government and private spending is by private firms. This is because private firms are known to have the ability to export more goods and services rather than delivering public goods and services. The third problem is increasing taxes on incomes and profits can reduce incentives to work and enterprise. If taxes are too high, people and firms may reduce their work effort which will reduce labour productivity, total output and profits. This will also causes cost of production to increase. As a result, demand for goods and services may fall and unemployment may rise. The fourth problem is that expansionary fiscal policies may cause inflation. This is because as taxes are reduced, consumers tend to use the extra money to spend on imported goods and services. For that matter, it will simply make imports greater than exports resulting inflation as well as negative balance of payment.
Expansionary monetary policies can achieve government objectives which involve reducing interest rates and expansion in the money supply. The achieved objectives are high and stable employment and high and sustainable economic growth rate. If interest rates are reduced, people and firms will borrow more, but will make saving money less attractive. Lower interest rates can therefore encourage investments from overseas and help boost output and employment opportunities. However, it may boost consumer demand for imported goods and services and therefore make a negative balance of payment. Faster economic growth may also create more pollution and waste, possibly conflicting with any environmental objectives. The expansion in money supply might as well triggers inflation if real value of money decreases as money supply increases.
ReplyDeleteContractionary monetary policies can also achieve government objectives by raising interest rates and cutting the money supply to reduce aggregate demand. The achieved objective is low and stable inflation. Increasing interest rates will make borrowing more expensive and this will reduce the amount of money banks available to lend. Reducing the quantity of money will also restrict the amount of consumers and firms have to spend on goods and services. However, contractionary monetary policies may result in lower output and more unemployment.
In conclusion, I do agree that fiscal and monetary policies are dangerous and might hurt the future economic growth if they are not used wisely.
100% Originality
Resources:
Economcs Textbook and Notebook
To describe that a monetary and fiscal policy instrument are like a double edge sword is a good simile. Because, it is true. In fact, many things that are important should be used wisely, if not, they will come with great consequences. As you can see, fiscal and monetary policy instrument are commonly used with governments because it helps them to achieve their macroeconomic objectives.
ReplyDeleteFirst of all, an expansionary fiscal policy instrument helps the government to handle problems where the aggregate demand is lower than the aggregate supply. In fiscal policy instruments, they will deal with situations like this by either increasing or decreasing the tax. Fiscal policy instruments are the public revenue, public debt, public expenditure and public borrowing. When government decrease tax, the aggregate demand will increase, which is what they are aiming for since it is lower than the aggregate supply. Since tax decreased, it gives a chance for the consumers to consume more goods and therefore, aggregate demand will increase.
Second of all, expansionary monetary policy instrument. This way, government will increase aggregate demand by cutting the interest rates and increasing the production of money supply. When interest rates are reduced, this will cause an increase in borrowing and spending of goods and services. In other words, consumers will borrow more, spend them, and save less. This way, aggregate demand will increase.
Third of all, contractionary fiscal policy instrument. This is the opposite of an expansionary fiscal policy instrument. In this policy instrument, the government aims for a decrease in the aggregate demand because it is higher than the aggregate supply. Therefore, the government will increase tax. By increasing the tax, the consumers will realize that they should stop spending their money on goods that will not fulfill their needs in life, and should start saving. Also, prices will rise which might reduce some demand because they don’t have the amount of money to afford buying the goods.
And last but not least, contractionary monetary policy instrument. In this policy instrument, the government will increase the interest rates and reduce the production of money supply. By having the interest rates increasing, the consumers will borrow less, spend less and start to save more. This is because borrowing loan from banks will get more expensive when the interest rates increases.
Fiscal policy instruments are normally used in public expenditures, to increase employment, public debt, increasing tax or decreasing tax, public borrowing and etc. On the other hand, monetary policy instrument include increasing or decreasing the interest rates, bank rates, CRR (cash reserve ratio) and SLR (statuary liquidity ratio).
However, the policy instruments are not perfect. They are fragile and should be used wisely. Which is why some specific policy instruments have rules in using them, in order to not create conflicts.
Fiscal policy instrument can cause some conflicts. First of all, it can be cumbersome to use. In other words, it is difficult to use because the government will have difficulty in estimating when to use and how much specifically does the tax will be reduced or increased.
Secondly, it can cause some crowding out effect. In this case, the public spending is more than the private spending. This is not efficient because private spending is more efficient than public spending because private spending is government spending.
And last but not least, an expansionary fiscal policy may create expectations of inflation. When it is not used wisely, it can cause an uncontrolled inflation. This is because the tax is reduced, therefore consumers will have more money to spend on goods and services.
ReplyDeleteTherefore, to overcome these conflicts and prevent them from actually happening. Fiscal policy instrument have some rules that must be applied before it will be used. Such as, current and capital public expenditures should be controlled seperately. Therefore, costs and benefits can be easily identified. And more such as, public sector should that the purpose of borrowing is to pay for capital expenditures only, and etc.
Other than that, monetary and fiscal policy instruments should be used wisely, other wise they will cause conflicts. Meaning, two or more macroeconomic objectives will be achieved but there will be some conflicts that are produced. Such as, decreasing the taxes to increase aggregate demand. It can increase the level of employment, economic growth rate and balance of payment. But problems will rise, inflation will increase. And due to this, unemployment will rise and production will decrease.
Overall, I simply agree that monetary and fiscal policy instruments should be used carefully. They should follow the rules in applying them in solving the economy problems, because if they are not used carefully then it will create more problems.
SOURCES : economics notebook and textbook
ORIGINALITY: 98%
The main objectives of macroeconomic policy implies the achievement of non inflationary, stable economic growth by using policy instruments, most notably those in the field of monetary and fiscal policy. The implications of the use of policies by the two key stakeholders are often conflicting. Therefore, a need for an adequate coordination mechanism among these holders has emerged as the necessity in order to achieve desired ultimate goals of economic policy.
ReplyDeleteFiscal policy relates to government spending and revenue collection. For example, when demand is low in the economy, the government can step in and increase its spending to stimulate demand. Or it can lower taxes to increase disposable income for people as well as corporations.
Monetary policy relates to the supply of money, which is controlled via factors such as interest rates and reserve requirements (CRR) for banks. For example, to control high inflation, policy-makers (usually an independent central bank) can raise interest rates thereby reducing money supply.
Both fiscal and monetary policy can be either expansionary or contractionary. Policy measures taken to increase GDP and economic growth are called expansionary. Measures taken to rein in an "overheated" economy (usually when inflation is too high) are called contractionary measures.
The legislative and executive branches of government control fiscal policy.
Policy-makers use fiscal tools to manipulate demand in the economy. For example:
Taxes: If demand is low, the government can decrease taxes. This increases disposable income, thereby stimulating demand.
Spending: If inflation is high, the government can reduce its spending thereby removing itself from competing for resources in the market (both goods and services). This is a contractionary policy that would lower prices. Conversely, when there is a recession and aggregate demand is flagging, increased government spending in infrastructure projects would lead to higher demand and employment.
Both tools affect the fiscal position of the government i.e. the budget deficit goes up whether the government increases spending or lowers taxes. This deficit is financed by debt; the government borrows money to cover the shortfall in its budget.
Monetary policy is controlled by the Central Bank. In Indonesia, this is Bank of Indonesia. The Bank of Indonesia chairman is appointed by the government. But the organization is largely independent and is free to take any measures to meet its dual mandate: stable prices and low unemployment.
ReplyDeleteExamples of monetary policy tools include:
Interest Rates: Interest rate is the cost of borrowing or, essentially, the price of money. By manipulating interest rates, the central bank can make it easier or harder to borrow money. When money is cheap, there is more borrowing and more economic activity. For example, businesses find that projects that are not viable if they have to borrow money at 5% are viable when the rate is only 2%. Lower rates also disincentivize saving and induce people to spend their money rather than save it because they get so little return on their savings.
Reserve requirement: Banks are required to hold a certain percentage (cash reserve ratio, or CRR) of their deposits in reserve in order to ensure that they always have enough cash to meet withdrawal requests of their depositors. Not all depositors are likely to withdraw their money simultaneously. So the CRR is usually around 10%, which means banks are free to lend the remaining 90%. By changing the CRR requirement for banks, the central bank can control the amount of lending in the economy, and therefore the money supply.
Currency peg: Weak economies can decide to peg their currency against a stronger currency. This tool is usually used in cases of runaway inflation when other means to control it are not working.
Open market operations: Central bank can create money and inject it into the economy by buying government bonds (e.g. treasuries). This raises the level of government debt, increases the money supply and devalues the currency causing inflation. However, the resulting inflation supports asset prices such as real estate and stocks.
However, the use of the mentioned instruments is complex, given the fact that they are in the hands of the monetary and fiscal authorities that are separate, and that often have conflicting goals.
Some of the policy measures designed to reduce unemployment may increase inflation. For example, an increase in government spending on pensions would raise consumption. This raise would encourage firms to expand their output and take on more workers. The higher aggregate demand may, however, raise the price level. Then, policy measures to reduce spending on imports may reduce the economic growth. A rise in income tax, designed to reduce households' spending on imports, would also reduce spending on domestically produced products. This fall in demand will reduce the country's output or at least slow down the economic growth.
Besides that, unemployment and economic growth tend to benefit from expansionary fiscal and monetary policies. In contrast, deflationary fiscal and monetary policies are more likely to be used to reduce inflation and spending on imports.
In conclusion, the establishment of appropriate coordination mechanisms and instruments of monetary and fiscal policies is the precondition for achieving the ultimate aims of the two policy holders, since otherwise, the holders of separate policies and mutually conflicting goals, would cause divergent macroeconomic trends.
ReplyDeleteIn this regard, there is extensive literature that confirms the necessity of establishing an adequate interaction between monetary and fiscal authorities, which in various ways may be grouped, and from which one can identify several trends, which range from the fiscal theory of the price level, through the strategic interaction of monetary and fiscal policy coordination models for testing related to two or more open economies, to coordination between the monetary and fiscal policies in a monetary union, and the new Keynesian dynamic general equilib- rium model.
In this sense, the influence of monetary on fiscal policy through its impact on interest rates, their term structure, inflation and inflation expectations, and the impact of fiscal on monetary policy achieved through a range of direct and indirect channels are obvious. In order to create conditions for the establishment of ef- fective coordination between the most important economic policy instruments,
it is necessary to establish institutional and operational arrangements in order to prevent the occurrence of macroeconomic disturbances arising as a result of inadequate coordination. The same can apply to arrangements related to central bank independence and involving the prevention and crisis management, limitation of direct loans to support the central bank, a balanced budget and limiting deficit for the establishment of the currency board, or the existence of formal or informal committee for the coordination of monetary policy and public debt management.
Originality 85%
References:
- http://en.m.wikipedia.org/wiki/Fiscal_policy
-Economic text book and note book
- http://www.investopedia.com/terms/f/fiscalpolicy.asp
- http://www.econlib.org/library/Enc/FiscalPolicy.html
Before knowing the conflicts we must first know the purpose of a macroeconomic objective. They have the purpose to keep inflation at a low and stable level, decrease unemployment, increase economic growth and maintain their balance of payment. To do this they must add some policies, fisical and monetary. As for the supply side they will do a few other policies
ReplyDeleteFisical policies are the policies that are controlled by the central government. They will control the amount of tax people have to pay and the public expenditure. Affecting the tax will increase/decrease the consumer's income. Public expenditure is the spendings made by government on private needs and wants.
Fisical policies can either be contractionary or expansionary. Contractionary fisical policies are the policies that reduce the demand. They will do this by increasing the tax to decrease people's disposable income and therefore reduce the demand. They can also do this by decreasing public expenditure.
Expansionary fisical policies are the policies that increase the demand. They will do this by decreasing tax. This would mean that people have a higher disposable income to spend on goods and services. Assides from decreasing tax they can also increase public expenditure on pension funds and others.
Monetary policies are the policies that are used by central banks. They will consist of interest rates. They can control the interest rate to affect the amount of borrowing/saving people in the country do. This will affect the demand.
Contractionary monetary policies are the policies used to try and decrease the demand by increasing the interest rate. This would mean the cost of borrowing money for purchase of goods and services will be higher causing a decrease in demand. They can do this by purchasing government bonds.
Expansionary monetary policies are the policies used by government to increase the demand through interest rates. They can do this by issuing government bonds. When they do this the interest rate will go down and the cost of borrowing will go down as well causing an increase in borrowing and demand.
As for the supply side the government can subsidise the company. This means that the cost of production is less which will cause an increase in supply. This will also mean firms will hire more employee and reduce unemployment.
Government can also provide specialized training for the workers. This would mean there would be more skilled workers. This causes companies to employ more workers and once they've done that they will increase the supply.
Government will also tend to set laws and regulations. This means that they will apply laws that will encourage firm to decrease/increase their supply. One example is when governments force people to wear helmet when they ride a motorcycle. Firms will take this as an opportunity to increase sales and therefore increase supply.
Policies however aren't always good. Some of them may have a negative response as well along with the positive response. One example is when the government try to increase the demand by reducing tax or increasing public expenditure. They will need to know exactly when and by how much if they wish to achieve maximum result. If they reduce the tax by too much firms will react by increasing its prices. When they increase their prices inflation will occur. Asides from inflation their balance of payment will also be unfavorable.
ReplyDeleteAnother example is when they try to decrease the demand by increasing tax. This means that the workers will have less disposable income. Same thing, they will have to know exactly by how much they need to increase the tax by. If they overdo it some of the workers may have less incentive to work and instead choose to be unemployed. This is because the governments are going to take a higher portion of their income so why bother.
One way to overcome this is by increasing the welfare funds. We get this welfare funds from the rich and poor and we can see the rich don’t mind tax as much as the poor. The government will often tax the rich people more and the poor less. They will use the money for pension funds and other public expenditures.
Government may focus on reducing inflation because through this they can reduce unemployment, make balance of trade favorable and high economic growth. Rising national income and employment can also mean the people are better off. Reducing inflation will also make domestically produced goods and services more competitive.
In conclusion almost all policies will have a bad turn of events if they are misused. Increasing demand causes inflation and poor balance of payment while increasing demand causes unemployment. They can fix this by taxing specific people more and some others less and by only focusing on trying to reduce inflation.
First of all, fiscal policy are controlled by central government which involve all the public revenue for example the tax both direct tax that are paid directly to government and indirect tax that are not paid directly to the government include hotel and restaurant taxes, also government income may come from the license fee of a company, profit of government offices and the disinvestments. While public expenditure which are divided into capital expenditure and current expenditure in which a capital expenditure are those expenses use by government for investments and those current expenditure are those expenses for salary of the government employees' and the fuel cost, and public goods. Also public debt may happen when the public expenditure is greater than the public revenue and it can be taken by domestic trade and international trade. While the public borrowing are the way to borrow and how things affected by borrowing money.
ReplyDeleteAlso there is another policy instrument beside fiscal policy which is monetary policy. Monetary policy are controlled by the central bank. It may affect the interest rates of a country, bank rate which means rate at which a commercial bank borrows, cash available in a bank and the cash revenue ratio.
Expansionary fiscal policy is when government increases the aggregate demand in an economy which can be done by decreasing the taxation in a country. When a tax is decrease in a country, people with personal income will spend it more and will encourage the workforce to be more productive to earn more income which can be used to buy needs and wants, by decreasing the taxation, amount of disposable income of a person will increase but there will also be a risk that the money are saved not spend which will not affect the demand side of the country.
While contractionary fiscal policy which aims to reduce the aggregate demand by reduce the public expenditure and increase the tac which will also reduce the amount of disposable income. However a fiscal policy also have some problems such as it is cumbersome to use, increase in public expenditure crowds out private spending, increasing taxes on income and profit may reduce incentives to work and enterprise, and an expansionary fiscal policy creates expectations of inflation.
An expansionary monetary policy used to increase the aggregate demand which can be used to cut tax rate and expansion in money supply. An expansionary monetary policy is similar to expansionary fiscal policy that also decrease the tax rate which affect on higher disposable income and individuals will spend more on goods and services they need and encourage themselves to earn more income but also have a risk if the individuals are saving their money rather than spending it.
Oppositely, a contractionary monetary policy are aimed to decrease the aggregate demand of a country which can be done by increasing their tax rate which also similar to a contractionary fiscal policy which also aimed to reduce the aggregate demand and use the decrease on tax rates.
ReplyDeleteBut also both expansionary and contractionary fiscal and monetary policy have a good side and bad side. An expansionary fiscal policy and monetary policy may achieved the objectives of high and stable employment since more people will invest, high and sustainable economic growth due to high demand so the output produced will also increased, and achieve the international trade and stable balance of payment but expansionary fiscal and monetary policy also cause some problems include increase on the inflation rate in which if the inflation rate increase, aggregate demand will decrease, per capital income will decrease, and decrease in the production in the country. And the contractionary fiscal and monetary policy also will achieved the low and stable inflation since people will save their money including government and government will not produce more paper money but oppositely, it will causes problem on high rate of unemployment since company have more cost and they will reduce their cost by fire some employees, low economic growth since demand are low and companies will produce an output based on their consumers that make the demand of their product, and there will be no international trade and stable balance of payment.
In conclusion, a fiscal policy and monetary policy are like double edge sword of not use properly since both fiscal and monetary policy are related to each other and they also should be use properly or else they can be a double edge sword for example those that happen in a country that the central bank are always producing paper money but the central government are always corrupt or saving it.
Sources :
-corner notebook
-economics textbook
Originality : 100%
sources : economy text book
ReplyDelete:http://en.wikipedia.org/wiki/Interaction_between_monetary_and_fiscal_policies
: https://answers.yahoo.com/question/index?qid=20091222222120AA7sFE9
originality 90%
Before we can determine that the monetary and fiscal policy is a double edge sword, we must first know what they are.
ReplyDeleteMonetary Policy: Is a part of the demand side policies that involves changing the money supply and/or interest rate in an economy to influence the level of aggregate demand and economic activity, it is also used by the government to influence the exchange rate of a country against other foreign currency, and in doing so to affect the level of international trade and transaction. And is also divided into two parts which is contractionary monetary policy and also expansionary monetary policy.
Fiscal Policy: is a part of the demand side policies that involves on varying the level of public expenditure and taxation in an economy to manage aggregate demand and influence the increase in economic activity. And is also divided into two parts which is expansionary fiscal policy and contractionary fiscal policy,and is controlled by the government.
the objectives of the 2 policy can both bring advantages for the country and problems for the country if not implemented properly.
Firstly the fiscal policy, the Expansionary fiscal policy can boost the employment of a country and it's GDP output by cutting the taxes on corporation tax and personal tax, because if the taxes is lowered it may encourage people to create new businesses, and new businesses means that there will be more job available for people and new businesses but prolonged effect of the expansionary fiscal policy may lead to deficit spending and when government finances this spending with increased sales of it's debt in financial market in may result in a negative effect on the country's borrowing and spending.
Now the contractionary fiscal policy: the contractionary fiscal policy can reduces pressure on prices in the economy by cutting the aggregate demand,through a reduction in the public expenditure by raising total taxation but this policy may decreases employment and growth in a country.
Next is the Monetary policy: the expansionary monetary policy cuts interest rates and expansion in the money supply to boost aggregate demand and if the interest rate is reduced people and fir will be able to borrow money more cheaply than before from banks using their credit cards and also lower interest rates can help increase consumer expenditure and increase investment expenditure by private sector firms this can help boost output and employment opportunities and lower interest rate may decrease local domestic currency and the demand for foreign currency rises therefore causing a decrease in the country's exchange rate.
then now the contractionary monetary policy: the contractionary monetary policy increases interest rates to reduce aggregate demand if the economy is overheating. and makes borrowing expensive. And reducing the quantity of money in the economy will also restrict the amount of consumers and firms have to spend on goods and service, the government can do this by selling government bonds at tempting interest rates, this will reduce the amount of money that the banks have available to spend but this however decreases inflation of a country because if consumer spends less then the inflation decreases.
In conclusion to our discussion is that the demand side monetary policy: the fiscal and monetary policy is a double edged sword because in between these advantages the demand side policy can create very large problems for a country.
References:
-Complete economics textbook.
-http://www.studymode.com/essays/Advantages-And-Disadvantages-Of-Contractionary-Monetary-1634232.html
-economics.about.com/cs/money/a/policy.html
-http://www.ehow.com/info_8745426_disadvantages-expansionary-fiscal-policy.html
100% originality based on smallseotools.com
Policy instruments are tools used by the government to overcome problems and achieve macroeconomics objectives. Policy instruments include demand side policy and supply side policy, monetary policy and fiscal policy. These policies are used together to achieve the same goal. However these policies can create other problems when they solve an objective.
ReplyDeleteExpansionary fiscal policy increase aggregate demand by reducing taxes. By reducing tax, it may decrease unemployment caused by lack of demand. Decrease in taxes may increase worker’s productivity as it increases their incentives and job satisfaction. It also will increase their disposable income and will encourage them to work more.
Expansionary fiscal policy involves increasing government spending, which will increase the aggregate demand. Government spending is increased because it creates demand for goods and services. The actions taken by expansionary fiscal policy will result in shift of aggregate demand curve to the right, which also increases economic growth.
However, if tax reduced, consumer spending on goods and services will increase and inflation caused by too much aggregate demand and rising costs could happen. Government should know when to decrease tax to avoid high inflation. Public borrowing may also increase if public expenditure exceeds public revenue ad government needs to take loans to cover the expenditure that exceeds the revenue.
The government to reduce aggregate demand uses contrationary fiscal policy. The policy works by reducing public expenditure and increase taxes. By reducing public expenditure, goods and services created by the government will reduce and will reduce inflation, which can lead to low and stable inflation. The actions taken by contractionary fiscal policy can lead to smaller budget deficit.
On the other hand, contractionary fiscal policy can cause further increase in unemployment. Contractionary fiscal policy works by increasing tax. If taxes are increase, it will reduce workers’ incentives and will decrease their productivity. It will also decrease consumer disposable income spend on goods and services as taxes are increased.
Expansionary monetary policy works by reducing interest rates and expanding money supply to increase aggregate demand of an economy. Government during economic recession when unemployment is rising will use expansionary monetary policy. Therefore the actions taken by expansionary monetary will decrease unemployment and increase employment.
Expansionary monetary policy will also be used to increase economic growth. Reducing interest rates will encourage consumers to spend more on goods and services. And therefore if public revenue increases and increase in aggregate demand, the will be an increase in growth of the economy. Lower interest rates will have higher rates of investment, which also contribute in sustainable development of the economy.
Contractionary monetary policy involves increasing interest rates and reducing money supply to reduce the aggregate demand of an economy. This policy will be used when inflation is high. This policy will be use to reduce inflation to make low and stable inflation. Increasing interest rates will make borrowing rates more expensive. This will make a decrease in the amount of money banks will need give to the lenders.
ReplyDeleteHowever contractionary monetary policy can lead to some problems. One of the problems is unemployment. Falling aggregate demand can lead in increase of unemployment as rising in interest rates will reduce their incentives and will also reduces their productivity. It will also reduce workers’ participation on the company.
It may also decrease economic growth. Increasing interest rates will make consumer to have less borrowing to buy goods and services. There may not be development in the economy because if consumers are not able to buy more goods and services, public revenue may decrease and this will lead to decrease in economic growth. Firms can also reduce their investment. This may also hurt future economic growth.
As the conclusion, both fiscal and monetary policy can contribute in increasing aggregate demand or decreasing aggregate demand to achieve macroeconomics objectives. However, if government implements these policies at the wrong time and not well managed, it may also cause to further problems of the macroeconomics objectives. I agree if these policies are not managed well by the government, it may be harmful for the country.
Originality: 98%
References:
− Economics textbook
− http://www.economicshelp.org/blog/617/economics/impact-of-expansionary-fiscal-policy/
The demand-side policy instrument is grouped into two: fiscal policy and monetary policy. Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and/or influence the country’s aggregate demands and economy. The fiscal policy has a purpose of stimulating economic growth during recessions, keeping a low and stable inflation, and maintaining a sustainable and stable economic growth.
ReplyDeleteMonetary policy refers to the macroeconomic policy through which the central bank manages the country’s money supply and the interest rates. The monetary policy is implemented by the central bank in order to achieve the macroeconomic objectives of full employment, price stability, and sustainable and stable economic growth. This involves actions like increasing the interest rate or changing the amount of bank reserves.
The fiscal policy carries an immediate response on the country’s economic development as it can significantly impact the national income. Economists believe that the fiscal policy is useful to stimulate economic growth. Fiscal policy may involve the government boosting the level of aggregate demand in the nation’s economy to increase employment and maintain a sustainable economic growth. Aggregate demand is the total demand of goods and services in an economy at a given price level and time period. Thus, the fiscal policy stimulates economic growth.
The monetary policy, unlike the fiscal policy, is politic-free. Because the central bank operates independently without political pressure, it is able to produce the best policy decisions based on the economic conditions and performances rather than on short-term political considerations.
The monetary policy stabilizes price in a market as inflation slows. Inflation causes ever-increasing prices, which negatively impacts the expenditures of consumers. Price fluctuations can cause consumers to lose confidence in their spending patterns. However, with the contractionary monetary policy, consumers’ confidence will increase as the policy encourages stable spending patterns.
Both fiscal policy and monetary policy is a potent tool for fighting inflation rates in an economy. Inflation refers to a sustained increase in the general price level of goods and services in the market. Inflation hurts the economy as it reduces the purchasing power of money, lower the nation’s standard of livings, and in some cases may even lead to financial crisis. Therefore, these policies are laid down by the central government, to keep a low and stable inflation. Governments will control the rate at which prices increase to achieve the macroeconomic objective of low and stable inflation through the implementation of fiscal and monetary policy.
However, the fiscal and monetary policy does not always work in the most efficient way in achieving the macroeconomic objectives. Thus, conflicts are established, as the macroeconomic objectives are difficult to achieve all at once.
ReplyDeleteFor instance, the implementation of fiscal policy produces conflict of interests. In order for the government to achieve full employment, the government will need to stimulate the nation’s aggregate demands. By applying this policy, the aggregate demand will shift to the right and price level will increase. A general increase in the price level of goods and services, or a cost-push inflation, will then be expected as the fiscal policy is put to practice. Reversely, decreasing the aggregate demand of the country’s economy will lead to an increase in unemployment.
Another problem with the government’s fiscal policy is the lag time. Fiscal policy requires some time before it can be officially adopted, implemented, and show positive effects to the economy. Increasing the government expenditures takes time as to produce this policy, multiple decision-makings is required. By the time it is ready to be implemented, it might be too late.
The fiscal and monetary policy implemented by both the government and central bank to achieve low and stable inflation in the long-run, can also affect the rate of economic output and employment in the short-run. Increased unemployment is a result of slowing down the economic production in order to reduce spending and achieve low and stable inflation. Because of this, the government needs to carefully weigh the cost against the benefit of low rates of inflation. High unemployment rate will shake consumer’s confidence and will reduce demands for many goods and services.
As a conclusion, the fiscal and monetary policy instruments are similar to a double-edge sword. Without using them in a correct and limited way, these policy instruments can hurt the economy and worsen more problems than it solve.
Anabelle – 8C
Originality (based on smallseotools.com): 98%
References:
• http://www.econlib.org/library/Enc/FiscalPolicy.html
• http://tutor2u.net/economics/revision-notes/as-macro-fiscal-policy.html
• http://economictimes.indiatimes.com/definition/monetary-policy
• http://www.economicshelp.org/blog/2253/economics/monetary-policy-vs-fiscal-policy/
• http://www.economicsonline.co.uk/Managing_the_economy/Monetary-policy.html
• https://answers.yahoo.com/question/index?qid=20080202033549AAb3qMh
To increase aggregate demand, government uses expansionary fiscal policy. Expansionary fiscal policy reduces taxes and/or increasing government spending (public spending). Unemployment is a situation where workers are willing to work with the existing wage rate but unavailability of job. Cutting taxes can help reduce unemployment. Reducing tax will increase employee's productivity and job satisfaction, as well as increasing their wages because they need to pay lower tax.
ReplyDeleteExpansionary fiscal policy also helps in balancing balance of payment. A positive balance of payment happens when exports are bigger than imports. A negative balance of payment happens when imports are greater than exports. Reducing taxes will help to boost exports and create positive balance of payment for the economy.
Increasing economic growth can also be done by expansionary fiscal policy. By increasing public spending, it encourage more consumer to buy goods and services. Reducing tax will also increase disposable income of an individual. This helps in sustainable development of the economy as more consumer spend more money on goods and services, the taxes receive by the government will increase and the taxes can be use for economic development like improving infrastuctures.
Expansionary fiscal policy can as a double edge sword for the economy if it's not used wisely. When taxes are reduce and aggregate demand increase, high inflation may occur. Inflation is a general rise in prices of goods and services. If high inflation happens, the value of money falls and may lead to poverty. What an economy wants is low and stable inflation. It may not be good for the economy if inflation keeps rising.
Government income (public revenue) are received from taxes paid by individuals. If taxes are reduced, public revenue may be less and the country may have less money to improve infrastructures. And also, if public expenditures are more than public revenue, government will need to borrow money to finance the shortages. This will increasing public loan/borrowing.
Contractionary fiscal policy is used by the government to reduce the aggregate demand of a country. To reduce aggregate demand, this policy increases taxes. This policy is can solve one of the macroeconomics objectives, which is inflation. Inflation may be reduces as taxes are increase and therefore the aggregate demand will fall. Low and stable inflation can be achieved.
However, contractionary fiscal policy has it bad impacts. Increasing tax can lead to increasing unemployment. It increases unemployment because aggregate demand will fall and lack of aggregate demand causes unemployment. Less disposable income of individuals to spend on goods and services will cause lack of demand.
Contactionary fiscal policy can also creates low economic growth. Less disposable income to spend on goods ands services will make the government to receive less tax and less income. the less the income receive, the less growth the country will have.
Expansionary monetary policy increases aggregate demand by reducing interest rates and/or increasing money supply. It is usually used during recession of an economy. Expansionary monetary policy can be used to reduce unemployment. It increases unemployment as reducing interest rate will make more demand and more demand will make more goods and services consumes by consumers. It will need more employees to produce more goods and services and therefore will increase employment.
Expansionary monetary policy can also used to produce positive balance of payment. As discussed before, a positive balance of payment show surpluses, happens when the exports of a country are greater than its imports. Lower interest rates will create positive balance of payment as prices of goods will be less and therefore there will be more exports.
DeleteThe bad side of expansionary monetary policy is that it creates inflation. Higher aggregate demand can create high inflation. Inflation increase poverty and standard of living of individuals will fall. Inflation will be good for a country will if it low and stable. If will discourage the economy if the inflation is high.
Contractionary monetary policy is used by the government to reduce inflation to achieve the macroeconomics objectives of low and stable inflation. Contractionary monetary policy is used by reducing aggregate demand by a rise in interest rates and/or reducing money supply. By increasing interest rates, there will be a fall in aggregate demand of an economy which make the prices of goods and services to rise and therefore there will be a fall in inflation. Low and stable inflation can be achieved for the economy if contractionary monetary policy is used correctly.
In conclusion, using government policies can lead to a disadvantage to the country itself too.
Kevin 8C
Source: Economics Textbook
95% originality
Demand side policies help influence the level of aggregate demand in an economy by using several policy instruments: total public expenditure, total levels of taxation, and rate of interest. There are two important demand-side policies: fiscal and monetary policy. Fiscal policies involve the varying of public expenditure and taxation to manage the levels of aggregate demad and influence economic activity. Monetary policies involve money changes in money supply and interest rates to influence them.
ReplyDeleteA common fiscal policy is the expansionary/reflationary. It aims the increase in aggregate demand in order to boost employment and output by increasing in expenditure and/or reducing taxation. Therefore, government will input this fiscal policy during economic downturn or recession. In this way, cutting taxes on profits can provide firms with an incentive to increase output and in investments in new productive capacity. It will also increase amount of people to participate in workforce, hence increasing productivity.
However, on the other hand, an expansionary fiscal policy will cause the increase in budget deficit, which includes many adverse effects. Higher budget deficit will require higher taxes in the future and increases chances of crowding out, therefore decreasing the sizes of private sectors. The implement of this policy boost consumer demands for import and therefore make the balance of international payments less favourable. Faster economic growth in the national input may also create more pollution and waste, possibly conflicting with any environmental objectives.
Contractionary fiscal policies have different aims compared to the expansionary: They aim to reduce pressure on the prices in the economy by cutting aggregate demand through a reduction in public expenditure and by raising total taxations. In this way, a budget deficit will be cut or can even go into surplus. In contrast, it will result in lower output and more unemployment, because of the impact by unpressurising total demand. Increasing the taxes to reduce total demand may cause disincentives to work, if this occurs there will be a fall in productivity and aggregate supply could fall. However higher taxes do not inevitably decrease incentives to work if income effect dominates.
In monetary policy, the main instrument is the minimum lending rate or rate of interest charged by central bank to loan money to banking system. Raising or lowering the interest rates affect the rate banks then charge to their business and personal customers.
Expansionary monetary policy cuts interest rates and/or expansion in money supply to boost aggregate demand, and, like expansionary fiscal policy, are used during economic recession. When interest rates are reduced, people and firms will be able to borrow money more cheaply than before from banks or by using credit cards.
ReplyDeleteContractionary monetary policy is the opposite of it as it raises interest rates and/or cutting the money supply to reduce aggregate demand if economy is overheating and increasing pressure caused by inflation. Its main purpose is to slow down the pressure-making inflation that accompanies a growing economy. Government uses several methods to do this, including slowing their own spending. The Fed can raise interest rates, making them expensive to borrow from banks. Slowing inflation by reining in economic growth reduces off pressure from markets; brings down overall demand—therefore prices also go down with it. It also increases chances to stabilize prices.
However with this case, they increases unemployment rates which is not good for the economy. When firms slow their growth rates, they tend to hire fewer employees. Increases in unemployment cost the government on unemplyment insurance administration costs and other social services expenses. The government must carefully balance this cost against their economic benefits through reducing inflation.
The Federal Reserve and central banks can use monetary policy in order to achieve low inflation in long run and affect economic output and employment in the short run; these goals sometimes conflict. Reducing interest rates to expand money supply and rising unemployment rates during downturn, for example, could spark the future inflation when monetary policy remains expansionary for too long. The best monetary policy aims to strike balance between both short- and long-term goals.
The macroeconomic objective of a government can prove difficult to achieve all at once, and many times, involving conflict. As mentioned before, for example, policies measuring to reduce unempoyment and boost economic growth may result higher rates of price inflation.
So as conclusion, demand-side policies, which influence levels of aggregate demand, is used to fulfill main economic objectives. However, they can be dangerous and cumbersome to use, especially if there rises onflict. However, not all eill always have trade-offs between them. There is no reason why low taxes, low rates of unemployment and high economic growth can only be achieved to the expense of low price inflation, a favorable international trade balance and reduced poverty in society. So there should be few reasons government will hold back – depending on the conditions. Demand side policies argue, can and should be designed to achieve all these aims at the same time by combining fiscal management of public spending and taxes with some supply-side policies.
Sources:
http://www.economicshelp.org/macroeconomics/fiscal-policy/fiscal_policy_criticism/
http://smallbusiness.chron.com/pros-cons-contractionary-monetary-policy-3871.html
Economics textbook
Originality: 94%
ReplyDeleteFirst of all, fiscal and monetary policies are those policies used by government to solve the case where the aggregate demand is greateer than aggregate supply or vice versa.
Fiscal policies are more under government’s control while monetary policies rely on banks. The fiscal policies include increasing taxes and cutting public expenditure which will cause a decrease in aggregate demand (contractionary fiscal policy). Not only that, it could also increase the work incentives of employees and the employees will tend to put more effort since they know they’ll receive more money. Another fiscal policy that can be applied is by reducing taxes and increasing public expenditure which will increase aggregate demand (expansionary fiscal policy) during economic downturn or recession. On the other side, monetary policies include cutting interest rates which will increase aggregate demand (expansionary monetary policy) or increasing interest rates which will decrease the aggregate demand (contractionary monetary poicy).
Yet, the statement that states the fisccal and monetary policies can cause problems could be true. Let us discuss first the problems with fiscal policies. Firstlly, fiscal policies could be cumbersome to use. Government couldnt know when and by how much should he cut the taxes and expand public spending. If he doesnt do it right and at the right time, a big inflation which is bad could occur. Another problem that could happen when taxes are reduced and public spending are expanded is that the government will need to borrow money from private sectors if the money collected from taxes werent enough. And of course the more money the government will borrow, the less money the private sector will have for its own spending. In this case, a crowding out will occur. On the other hand, if we increase taxes and decrease public spending, this will reduce the incentives of work since the employees will tend to put less effort because the wages are cut. This could cause an unemployment problem and a less supply problem.
Only fiscal policies wouldnt help that much. Monetary policies should also be applied in achieving the objectives. Cutting interest rates will help the aggregate demand of a country to increase. Since the interest rates are lower, peoople tend to borrow more money from banks. This will make people borrow more and have more money to buy the goods or services. But this is could be bad too. If the ointerest rates were cut too much, inflation might occuur since the aggregate demand will rise. Another thing is to increase interest rates. This could decrease aggregate demand and could therefore decrease the inflation. Since there’s less demand, the firms will not be brave to try to increase the prices adnd supply.
So that we could assume that the government macroeconomic objectives which are to keep low and stable inflation, high and stable employement, balance of payment, and economic growth will be achieved through these objectives in conditions where aggregate demand is greater than aggregate supply, or where aggregate supply is greateer than aggregate demand. But these objectives cant always go on as what government has thought. These could go the other way which causes the plans wont work. Which means, some problems or unsuitable situations might occur especially if the plans are under control. The problems occuring could be handled though. For example when the government aimed to increase the aggregate demand of the country and it didnt go as the government has planned, but it creates inflation. Government could motivate the employees to produce more each time in order to increase supply, or government could also increase and put higher taxes so that the firm(s) could decrease the price. Yes, inflation is good if its undercontrol . But it wont be good anymore if its too much.
ReplyDeleteBeing a government isnt that easy. A government should be responsible of the country and make the right decisions. A government shall also be clever enough in using all the policies , demand and supply side policies in achieving the macroeconomic objectives. He needs to apply the policies accurately in a good way. Government shall also learn politics and economics of the country.
Originality: 90%
Source: economics notes and textbook
Name: Jacqueline Sheerine Andersen
Class: 8C
Fiscal Policy is a use of taxes and subsidies, or government expenditure to control aggregated demand. Increase in taxes causes left shift on aggregated demand because tax on certain good will increase the price of the good. In addition, increase in income tax will decrease the amount of available income which leads to the decrease in aggregated demand. Subsidies on the other side, encourages people to purchase by reducing the price. Subsidies and Taxes uses law of demand in order to control aggregated demand.
ReplyDeleteAdvantages of using fiscal policy is that it can significantly impact the national income and therefore have immediate effect on the economy. In addition, taxes on negative externalities decreases consumption of negative externalities or demerit goods. Similarly, subsidizing merit goods or public goods will increase the consumption. Another advantage is that tax cuts on wages encourages people to work and therefore, shift the long run aggregated supply curve to the right. Lastly, different rate of taxes on different levels of income reduces gap between the rich and the poor. Not only controlling aggregated demand, fiscal policy in long term can benefit the society in many different ways.
However, there are some disadvantages of fiscal policy. One of them is its inflexibility. Changes in direct taxes or government spending may take considerable time because of both political and moral reasons. For example, taxing rich people more than the others might be unfair for them. Another disadvantage of fiscal policy is that another problem can rise when solving the other. For example, stimulating aggregated demand to decrease the demand-deficient unemployment may worsen inflation because right shift in aggregated demand will cause rise in price level. Reversely, decreasing aggregated demand in order to decrease inflation will cause demand-deficinet unemployment.
Monetary Policy
ReplyDeleteAdvantage: Low Inflation, and Political Independence. The two goals of monetary policy are to promote maximum sustainable levels of economic output and foster a stable price system. Stable prices mean keeping inflation low, and the Federal Reserve Bank of San Francisco concedes that low inflation is all that monetary policy can achieve in the long run. Inflation reduces the purchasing power of money, harming economic growth. In contrast, stable prices enable households and businesses to make financial decisions without worrying about sudden, unexpected price increases. When central banks operate free of political pressures, they are free to make policy decisions based on economic conditions and the best available data on economic performance, rather than short-term political considerations imposed by elected officials or political parties. The U.S. Federal Reserve operates with a high level of political independence, even though it is accountable to Congress. Federal Reserve board members are presidential appointees but have staggered terms to make it more difficult for a president to load the board with favorite appointees. When central banks lack this independence, monetary policy becomes subject to political pressures. Harvard economist Greg Mankiw, for example, writes that central bankers that lack political independence may manipulate monetary policy in a manner favorable to the political party in power.
Disadvantage: Conflicting Goals, and Time Lag.
The Federal Reserve and other central banks can use monetary policy to achieve low inflation in the long run and affect economic output and employment in the short run. The Federal Reserve Bank of San Francisco reports that these goals sometimes conflict. Reducing interest rates to expand the money supply and stem rising unemployment rates during a recession, for example, could spark future inflation if monetary policy remains expansionary for too long. The best monetary policy seeks to strike a balance between these short- and long-term goals. In contrast to fiscal policy, which quickly stimulates additional money into the economy as governments increase spending for government programs and public projects, monetary policy actions take time to work their way through the economy, especially a large modern economy such as that of the U.S. and other world economic powers. The San Francisco Fed estimates that monetary policy actions to affect output and employment can take three months to two years for their effects to be felt. Actions may take even longer to affect inflation -- sometimes more than two years.
Source:
http://12chunso.wordpress.com/2011/05/11/advantages-and-disadvantages-of-fiscal-policy/
Originality: 87%
Fiscal policy is one of the demand side policy. fiscal policy is the use of government revenue collection or taxation and expenditure or spending to influence the economy, if not it will involve the government to change the levels of taxation and government spending in order to influence the AD and the level of economic activity. There are 3 types of fiscal policy: Neutral fiscal policy, Expansionary fiscal policy, and Contractionary fiscal policy.
ReplyDeleteGovernments need to raise some capital to cover both short-term run and long-term run debt obligations. Typically, governments generate capital by imposing taxes. Contractionary policies are designed to reduce public debt in which case public expenditure decreases while tax rates may increase. Expansionary fiscal policies are designed to drive economic growth in which case governments cut taxes so individuals and investors have more capital to spend. Politicians can use fiscal policies to move the economy away from dangers such as looming recessions or increasing inflation. Critics of fiscal policy argue that nature should run its course and that fiscal policies only delay the inevitable when economies are in a downward spiral. Additionally, some people even argue that high taxes and excessive spending are anti-capitalist since the policy makers are taking control of the free market economy.
Government entities can reassess fiscal policies on a regular basis and reduce or raise spending and taxes whenever it’s needed. However, many people choose to vote politicians whose ideological beliefs cause them to promote certain types of policies such as increased government spending or the elimination of certain tax cuts. Therefore, the advantages of fiscal policies in democratic nations include the fact that the electorate can indirectly control policy decisions by choosing politicians based upon their economic ideologies. Freedom of choice can also prove problematic because dissatisfied voters can easily replace politicians whose fiscal plans have yielded unpopular results. In some democratic nations, political parties seldom have long enough to enact such policies before election results lead to a party with an opposing viewpoint coming into power.
In some political bodies such as the union of European, politicians don’t have the ability to create wholesale fiscal policy decisions but they can only give on limits on the country's spending and tax policies. During economic fall, this means that the political leaders from variety nations can work together between one with another fairly easily because all of them are operating under the same limitations. However, in the economic sphere tight regulations drive some people to not obeying the rules or even to commit fraud; analysts refer to this danger as moral hazard. People who are unable to meet certain deficit reduction targets may falsify the records to save their own jobs. In the absence of fiscal policies, such individuals may act more honestly since they do not have onerous targets to meet.
While proponents and opponents of fiscal policies will argue the merits and disadvantages of such actions, economic conditions are impacted by many other factors that governments don’t control. Investors of the Stock market can drive economic growth simply by buying shares in expanding firms. Many nations including the US and Great Britain have unelected policy makers working for the nation's banks and these non-partisan officials have the ability to control the nation's money supply even if they have no influence on fiscal policy. Therefore, while fiscal policy makers are influential, many other people have almost as much impact on the economy.
ReplyDeleteThe advantages of using fiscal policy is that it can significantly impact the country’s income and therefore have immediate effect on the economy. In addition, taxes on negative externalities decreases the consumption of negative externalities or demerit goods. Subsidizing public goods will increase the consumption also. Another advantage is that the tax cuts on wages to encourages people to work and therefore, shift the long run aggregated supply curve to the right. Lastly, different rate of taxes on different levels of income reduces the gap between the poor people and the rich people. Not only controlling the AD, fiscal policy in the long term run can benefit the society in so many different ways.
There are also some disadvantages of fiscal policy. The first one is its inflexibility. Changes in government spending or direct taxes may take considerable time because of both moral and political reasons. For example, taxing rich people more than the others might be unfair for the others. Another disadvantage of fiscal policy is that another problem can rise when solving the other. For example, stimulating AD to decrease the demand-deficient unemployment may worsen inflation because right shift in AD will cause the price level to increase. Reversely, decreasing AD in order to decrease inflation will cause demand-deficinet unemployment.
The conclusion is that there are many advantages and disadvantages of fiscal policy.
References:- http://en.wikipedia.org/wiki/Fiscal_policy
Monetary policy :
ReplyDeleteThe actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves).
Disadvantages and Advantages:
The advantage is low inflationThe two goals of monetary policy are to promote maximum sustainable levels of economic output and a stable price . Stable prices mean keeping inflation low
And t The disadvantages of monetary policy include conflicting goals and time lag. The advantages of monetary policy include low inflation and political independence. Monetary policy is typically conducted by central banks.
Fiscal Policy:
Fiscal Policy is a use of taxes and subsidies, or government expenditure to control aggregated demand. Increase in taxes causes left shift on aggregated demand because tax on certain good will increase the price of the good. In addition, increase in income tax will decrease the amount of available income which leads to the decrease in aggregated demand. Subsidies on the other side, encourages people to purchase by reducing the price. Subsidies and Taxes uses law of demand in order to control aggregated demand.
Advantages and disadvantages of fiscal policy:
Advantages of using fiscal policy is that it can significantly impact the national income and therefore have immediate effect on the economy. In addition, taxes on negative externalities decreases consumption of negative externalities or demerit goods. Similarly, subsidizing merit goods or public goods will increase the consumption.
Disadvantage is inflexibility because change in tax may be a long time due to politic reason or economic reason
When we say the policy can be double edged sword if it is not use wisely is called policy conflict and these are some of the example
Policy conflicts
Conflicts of policy objectives occur when, in attempting to achieve one objective, another objective is sacrificed. There are numerous potential policy conflicts, including:
Full employment vs low inflation
The conflict between employment and prices is the most widely studied in economics. If policy makers attempt to undertake job creation by injecting demand into the economy, by expansionary fiscal or monetary policy, there is a danger that prices will be driven up. This conflict is best explained by reference to the Adorable as. It is likely that the trade-off still exists, despite the UK economy approaching full employment and prices still remaining stable in recent years.
Economic growth vs stable prices
This conflict is similar to the employment/inflation trade-off and can be understood through the Phillips Curve and the AD/AS model. If, through a fiscal or monetary stimulus of aggregate demand, the economy grows too quickly, aggregate supply may not be able to respond and prices may be driven up.
Economic growth vs a balance of payments
As an economy grows, import spending is stimulated relative to export revenue. Policy makers have to be aware that a ‘dash for growth’ could lead to balance of payments problems.
So my conclusion, yes it can be double edges sword for fiscal and monetary policy because if we don't use it wisely it will create conflict of interest , instead of solving the problem the policy will give problem
Sources:
Wikipedia
Economic textbook
Michael 8C
Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy, or else it involves the government changing the levels of taxation and government spending in order to influence Aggregate Demand and the level of economic activity. The effect of the policy includes Contractionary and Expansionary policies. While contractionary instrument decreases business level, expansionary instrument increases business level. Fiscal policy can do it through taxation and budget spending program. Increasing taxes will slow down business level, while decreasing taxes will heat up business level. Conversely, tightening budget spending will slow down business and loosening budget spending will stimulate business.
ReplyDeleteMonetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. Similar to fiscal policy instruments, monetary policy has contractionary and expansionary effects. The monetary policy instrument includes reserve requirements, discount window lending, and interest rates.
While made to stabilize the economics of a country, sometimes fiscal policy instruments and monetary policy instruments can create such interactions as:
1. Supply shock
During a negative supply shock, the fiscal and monetary authorities are seen to follow conflicting policies as the fiscal authorities would follow expansionary policies to bring the output at its original state while the monetary authorities would follow contractionary policies so as to reduce the inflation created due to shortage in output.
2. Demand shock
During a demand shock (a sudden significant rise or fall in aggregate demand due to external factors) without a corresponding change in output that results in inflation or deflation which can also be termed as inflation or a deflation shock, it is observed that the two policies work in harmony. Both the authorities would follow expansionary policies in case of a negative demand shock in order to bring back the demand at its original state while they would follow contractionary policies during a positive demand shock in order to reduce the excess aggregate demand and bring inflation under control.
3. Cost push shock
A cost-push shock is defined as a change in inflation that is not a result of pressures in the economy. The macroeconomic goal under such a situation is to optimise between reducing inflation and reducing the gap between the actual output and the desired level of output. A contractionary monetary policy under such a scenario raises the real interest rates which in turn not only reduces consumption thereby dampening aggregate demand and inflation but also raises the labour supply as workers are willing to sacrifice current leisure along with current consumption. This further dampens the inflation rates.
4. Fiscal shock and policy rate shock
In case of a positive fiscal shock i.e. increase in fiscal deficits, the aggregate output rises beyond the potential output thus raising the aggregate demand. Subsequently, this leads to dissavings and lowering of investments which further depresses output in the long run.
Judging from the types of interactions that can take place, it is best that fiscal and monetary policy instruments are managed in such a way to avoid having those interactions.
Sources:
http://en.wikipedia.org/wiki/Fiscal_policy
http://en.wikipedia.org/wiki/Monetary_policy
http://en.wikipedia.org/wiki/Interaction_between_monetary_and_fiscal_policies
http://www.socialstudieshelp.com/eco_mon_and_fiscal.htm
Fernando 8C
Originality: 80%
Fiscal Policy involves varying the overall level of public expenditure and taxation in an economy to manage aggregate demand and influence the level of economic activity. It is related to the central government, state (provincial) and district and reinforces public revenue, public expenditure, public debt and public borrowing.
ReplyDeleteMonetary policy involves changes in the money supply and interest rate in an economy to influence the level of aggregate demand and economic activity. It is given to the central bank (BI) and reserve bank, which are autonomous organizations that are responsible for the parliament. It work using methods involving the interest rate, bank rate, which is the rate at which commercial bank borrows, cash reserve ration (CRR), which is the amount of money every bank has to keep, statuary liquidity ratio (SLR), which is the liquidity they have to keep with the central bank and repo rate, which is the rate at which bond papers are issued to maintain a certain amount of money with the central bank.
Both fiscal and monetary policy is useful to achieve certain objectives when it is controlled. When it is out of control, the macroeconomics cannot be obtained, instead it will result the opposite.
Expansionary fiscal policy can help achieve several macroeconomic objectives. The first would be high and stable employment this can be obtained as the aim is increasing aggregate demand. It involves increasing expenditure and reducing taxation. Cutting taxes on personal incomes will increase productivity as it encourages workforce and cutting taxes on profits will increase output. Next objective would be high and sustainable growth rate. As the aim in this policy is to increase aggregate demand and using ways like increasing expenditure and reducing tax will result to higher amount of income and output, it may increase national income too. It may increase the overall economy growth rate and affirm the development of the country. The last objective achieved is a balanced international trade. It involves an increase in the internal monetary flow or exports. Nevertheless, this policy can cause inflation. It is due to the reduction of taxes increases disposable income of consumers that might use it to buy imported goods. The existence of inflation decreases per capital income or PCI and real income too.
Contractionary fiscal policy can help achieve one of the macroeconomics objectives, low and stable inflation as the aim is decreasing aggregate demand. It involves decreasing expenditure and increasing taxation, which will reduce the total disposable income and consumer expenditure. This will also help control international exchange and exchange rate, as when income is reduced, people will spend less on goods and services. Despite the advantage of achieving low and stable inflation, this policy can cause drawbacks such as unemployment and lower output. Unemployment might occur due to low income workers may be cut back and lower output, as workers are not motivated due to low wages.
There are disadvantages of using fiscal policy and the overuse of fiscal policy has contributed to these conditions. Fiscal policy is cumbersome to use. It is hard for a government to know how much and when to increase public spending, interest rates and taxes to be used as a policy instrument to achieve such objectives. Fiscal policy causes public spending to private spending crowding out. Public spending is control by the government while private spending is control by the private firms. Private firms are able to have more exports of goods and services than convey public goods and services. The third problem is increasing taxes on profits and incomes can reduce incentives to work and enterprise. When cutting taxes on incomes, workers are less likely to be motivated to work. Cutting taxes on profits can reduce output produced and output in an enterprise. It will also cause cost of production to increase and so demand for goods will reduce and unemployment will rise. The last drawback would be an expectation of inflation. When taxes are cut back, disposable income of individual increases and may spend on imported goods. This will result in greater imports than exports that will lead to negative balance of payment and inflation.
ReplyDeleteExpansionary monetary policy can help achieve a few macroeconomics objectives. In this policy, the aim is to increase aggregate demand, which involves in increasing money supply and decreasing interest rates. The objectives that can be achieved are high and stable employment and high and sustainable economic growth. When interest rates are reduced, people will borrow money more and save less. Cutting interest rates can help increased expenditure of consumers on goods and services and of private sector firms on investment. This will boost output and employment as well. But, it may increase demand of imported goods and services from consumers, which will result in negative balance of payment. A faster rate of growth in the economy will lead to pollution and environmental damages just like what is happening over in China. Also, an increase or expansion in money supply will lead to inflation as the value of money decreases.
Contractionary monetary policy can help achieve low and stable inflation as the aim is decreasing aggregate demand. It involves in increasing interest rate and decreasing the money supply. An increase in interest rate will make borrowing more costly and reduces the amount of money the bank will lend. A decrease in the money supply will lead to a decrease in the spending of goods and services, which will in less demand. When there is less demand, supply or output of firms will decrease which is a drawback. Also, an increase in unemployment might increase due to less output, less workers needed.
All in all, I do agree that fiscal and monetary policies are dangerous and might hurt the futures economic growth if they are not used wisely or they are not controlled.
Resources:
Textbook
Notebook
Originality: 90%
Monique 8C