Grade 8B 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
Government have four main macroeconomics objectives including low and stable inflation, high and stable employment, high and sustainable economic growth, and a stable balance of international trade and payments . Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. This includes national, regional, and global economies. This four macroeconomics objectives are such as first low and stable inflation second high and sustainable income third high and stable economic growth and fourth sustainable international trade and Bop and the other two are such as and sustainable development
ReplyDeleteGovernment could fix these two problems by ways such as policies, governments have two types of policies demand side policy and supply side policies. Government uses supply side policies for long term run while government uses demand side policy for short term run
Governments have two types of demand side policy from monetary policy and fiscal policy,
monetary policy is the policy that control the money supply by controlling the interest rates of a country if a country is having a prosperous time and too much aggregate demand government should give a brake to this the way is by increasing interest rates people will save more and borrow less this is a contractionary monetary policy but if a country is in recession where Aggregate demand is so low government could increase it by decreasing interest rate so people save less and borrow more to buy stuffs this is a expansionary fiscal policy
Fiscal policy is the use of government taxation an 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 so people will save more rather than spending and this also will increase country money so they can use it for the country growth opens schools with this money they are having , keep inflation from happening because the money peoples keep will also be given some percentage they have so it prevent the inflation to happen because annually government take some money so the money won’t pile up, give subsidy to the exports in the country so higher export rates and more people are interested in exports and they can also subsidized Indonesia products so less import will be make .last a growth in the country economics of that country because of the money and the development they are doing and the way to impose this is two by direct taxes such as the one we must pay monthly or indirect taxes such as sales tax , specific tax , value added tax or goods and service tax.
but In some cases policy aims might conflict.
ReplyDeleteSuch as when government wanted to increase economic growth by monetary expansionary policy economy is growing , and so unemployment will also indirectly but this can cause a higher inflation in the market so goods price will rise because more AD .In 2008 there appeared to be a renewed conflict in the UK between inflation and economic growth. Growth had been strong for some years but inflation was picking up and headed well above target. One of the reasons was the external inflation shock from rising oil, gas and food prices. On the monetary policy front, the Bank of England’s MPC didn’t want to cut interest rates because inflation was above target, but, a period of interest rates above 5 per cent contributed to a steep slowdown in the economy – the effects were most obvious in the housing market. In the summer of 2008 CPI inflation was 5% and policy interest rates were at the same level but the economy was already slowing down and the recession was just a few months away. Once the full extent of the credit crunch became apparent – the bankruptcy of Lehman Bros was a pivotal moment – the Bank of England along with many other central banks decided to make aggressive cuts in interest rates. The threat of stagflation (rising inflation and weak growth) was being replaced by the risks of a deflationary slump (falling output, rising unemployment and falling prices). The key question is whether very low interest rates would be sufficient to prevent another conflict between macroeconomic objectives.
Second is when government want to increase economic growth inflation can decrease balance of payment .A period of fast growth may come into conflict with the balance of payments. Much depends on the income elasticity of demand for traded goods and services. In the case the UK, the evidence is that consumers have a high propensity to consume imports; the income elasticity of demand is strongly positive. Say for example, real disposable incomes grow by 3% and that the Yed for imports = +2.5. That would lead to a 7% rise in the volume of imports. Unless there is a corresponding rise in exports, we expect to see a worsening of the balance of In a recession, this effect works in reverse as demand for imported products including raw materials, components and ready to consume goods and services declines. The trade balance will improve although the root cause is a drop in economic activity.
So in my conclusion beside for benefiting government when government uses this policies to help and control their country so they will have a good economic growth and development this also can cause government to get other causes to this policies that are created such as by connection of Economic growth and the balance of payments and conflict between economic growth and inflation so government must also take the risk of their poliices
Originality:
90%
Reference:
-Cornell notebook
-Economic book
-wikipedia
Fiscal policy will consist of public expenditure , public revenue and borrowing/ debt services. Monetary policy is the one that control the supply of money and the interest rate . The one that control monetary policy will be the central bank .There are two type of policy instruments , which are demand side policy and supply side policy . demand side policy will consist of contractnionary and expansionary fiscal and monetary policy . Both of them are used to control the aggregate demand . supply side policy will be the one that control the aggregate supply. The fiscal and monetary policy instrument will of course have advantages and disadvantages.
ReplyDeleteSo I agree that fiscal and monetary policy instrument may cause some problems to the government it self. Sometimes , this policy instrument may be useful but if not being used carefully , it can be dangerous. Some problems will be like , First , its cumbersome to use .its difficult for the government to know exactly when and how much money did they need to spend on or cut taxes during an economic downturn. Increasing or lowering the aggregate demand by cutting or increase the taxes may cause the economy to overheat . The example will be like if a country is having a problem of unemployment . So what the government do to solve this problem is by cutting taxes. By cutting taxes , than more people will buy product , and it will increase the production . if there is an increase in production , company will need more employee. So , unemployment can be solved . But in other side if government is cutting a lot of taxes , it can cause inflation . many people want to buy goods and price is rising. Another example will be like if the government is setting the taxes higher. This may solve inflation , but in other side it can cause higher unemployment. Second , Increases in public expenditure(fiscal policy) crowds out private spending .If the government want to have higher public spending , means they also need some extra money . sometimes , the problem is that they don’t have enough money so they need to borrow extra money from the private sector. The more money the private sector lends to a government the less it has available to spend it self . This is called crowding out . if the government have higher debts , then it means , gov’t need to spend their public revenue to pay the debt. They will only focus on paying debts and have a less spending in public goods, infrastructure such as roads , etc. This can cause another problem also , which is To encourage people , firms to buy the gov’t stocks , they will increase the interest rates . But if there a higher interest rates , then , many people and firms will discourage to buy a new equipment to have a higher productivity . So , in result , this can cause a reduced in economic growth .Third , higher taxes may cause people have a lower motivation to work . this can also cause lower enterprises , which can cause lower total productivity. Fourth , expansionary fiscal policy may cause inflation . expansionary fiscal policy will increase the aggregate demand . so in order to increase it , they will need to cut taxes . cutting taxes may cause people want to buy more . This can cause an increase in price which lead to inflation .the example will be like in England now . its stated hat Bank of England Governor issues warning over housing inflation .This is caused by the decrease in taxes.
But , of course fiscal and monetary policy instruments can also have some advantages. This policy instruments are used to help the government in achieving the 4 main government objective. This policy instrument are used to , First , help the government to make the inflation stable and low . government can have the contractnionary fiscal policy . this is used to lower the aggregate demand by increasing taxes . Increasing taxes may caused lower people want to buy goods and make the prices go down . Second , it can help the government to have a high and stable employment . Government can use the expansionary fiscal policy. This is used to increase aggregate demand by cutting down the taxes . cutting down the taxes may result more company want to spend on those new investment which may require new employee. Third , it may help the government to stabilize and make the economic growth high. They will used expansionary fiscal policy to increase the demand by cutting taxes . if the taxes is low , then more people want to buy goods. If there is more demand , higher production will be the result. Higher production will cause a higher economic growth. Fourth it will help the government to have a stable balance of payment .This may involved both contractionary and expansionary fiscal policy. They will used contactionary fiscal policy for the outside product and used expansionary fiscal policy to the local company to have a higher production . They will charge higher taxes for the import products , so that less people will buy . then this may help to stabilize the balance of payment.
ReplyDeleteSo in conclusion , its true that fiscal and monetary policy instrument may cause some problem . But it will only happen if its not used wisely . This policy instruments will be very useful for the government in achieving their 4 main objectives. That’s why actually this fiscal and monetary policy instruments is really good and have more advantages than its disadvantages
Originality = 96% unique content
References :
- Note book
- Text book
- http;//www.telegraph.co.uk/finance/bank-of-england-governor-issues-warning-over-housing-inflation.html
kezia , 8b
The fiscal and monetary policies are instruments used to achieve the government’s macroeconomic objectives which are low and stable inflation, high employment, sustainable economic growth and a balanced balance of payments. Even though these policies can be effective it also can cause even more prolems for the government instead of achieving the objectives of the government. Fiscal policy is the use of government taxation and expenditure to influence the economy. This policy is used to affect aggregate demand the level of economic activity, so if unemployment is high the fiscal policy can be used to increase aggregate demand so that more workers will be hired to make products to satisfy the people. Fiscal policy consists of public revenue, public expenditure and borrowing/debt services. Monetary policy is a policy used to control the supply of money. This policy often targets the rate of interest for the purpose of promoting economic growth and stability. This policy is maintained by increasing the interest rates and changing the amount of money banks need to keep in the vault.
ReplyDeleteAn advantage of using the fiscal policy is it can significantly impact the national income and therefore effct the the economy immediately. This is why many governments use the fiscal policy to achieve their objectives because this policy is very effective and can influence the economy quickly. An advantage of using monetary policy is that it can cause low inflation. This policy has a goal of keeping prices stable and stable prices mean low inflation so this policy can be used for the long run. Inflation reduces the purchasing power of money because the prices keep on increasing, so with stable prices more households and businesses will be able to buy products and make financial decisions without worrying about sudden or unexpected price changes. Another advantage of fiscal policy is that it can benefit the society in the long run as well. Tax cuts on wages encourages more people to work harder and this will increase aggregate supply, with more products available aggregate demand will also increase and therefore consumption will increase. Different rate of taxes will also reduce the gap between the rich people and the poor people. Pople with higher incomes have to pay higher taxes while people with low income will pay lower taxes because they’re not earning as much. With the gap reduced discrimintaion of the poor will also decrease. Another advantage of monetary policy is it gives political independence. When central banks are free from political pressures they are able to make policy decisions based on economic conditions.
Even though these policies can effectively achieve the government’s objectives it can cause huge problems for the government if not used properly by a government. A disadvantage of fiscal policy is its inflexibility. Changes in direct taxes or government expenditure can take a lot of time because of both political reasons and moral reasons. An example is taxing rich people more might be unfair for some of the rich people. Another disadvantage of the fiscal policy is that it can cause a problem while solving another problem. For example stimulating aggregate demand to decrease unemployment will worsen inflation because the price levels will increase instead of being stable. Another example is decreasing aggregate demand will increase unemployment. With less demand for a product lesser workers are needed so companies will fire a lot of workers in order to keep their profits high. The unemployment will only decrease if aggregate demand increases. A disadvantage of monetary policy is it causes goals to conflict with each other. Most central banks use this policy to reduce inflation in the long run and affect economic output in the short run. These goals might sometimes conflict with each other. Reducing interest rates to expand the money supply during a recession might cause inflation to rise in the future if the policy remains expansionary for a long time. Another disadvantage of monetary policy is time lag. This policy takes a long time to affect the economy unlike the fiscal policy. So if they want to solve inflation it might takes months to years to effect the inflation of a country.
ReplyDeleteSo in conclusion the fiscal and monetary policy can be like a double edged sword if not used properly. These polices can be effective because the fiscal policy is fast and the monetary policy can affect interest rates.
References:
http://12chunso.wordpress.com/2011/05/11/advantages-and-disadvantages-of-fiscal-policy/
http://en.wikipedia.org/wiki/Monetary_policy
http://en.wikipedia.org/wiki/Fiscal_policy
http://www.ehow.com/info_8239910_advantages-disadvantages-monetary-policy.html
97% original
Government has four main macroeconomic objectives that they wish to achieve in order to sustain a prosperous and moving country. These four objectives include: low and stable inflation, high and sustainable economic growth, high and stable employment, and also international trade of balance of payment. To achieve these objectives and solve problems such as inflation in the country, government is served with two types of policy, which are the demand side policy, and the supply side policy. The supply side policy is design to increase the productivity of a country, shifting the aggregate supply curve outwards, in the other hand; the demand side policy affects the aggregate demand of the consumers in the level of economic activity. They both are divided again into the monetary policy and fiscal policy. In monetary policy, they are responsible for controlling the money supply by the country’s interest rate, simply said, they are controlling the interest rate. In a fiscal policy, they are handling the problems by raising or decreasing the tax rates in a country, controlling the purchase and demands of the country. Both policy works very well in different state or different scenarios, it is important to use the demand side policy for short-term cases, and using supply side policy in long term cases.
ReplyDeleteUsing these types of policy will have its own advantages and risk of causing new problem, or as we called it, policy conflicts. The conflicts of the policy macroeconomics objectives happens when in attempting to achieve one objectives, another objective is causing a problem. There are many scenarios where the policy conflict may occur.
In a case of solving the employment, prices in economics may be affected. There is a danger that prices will be driven up if the policy makers are attempting to undertake job creations by injecting the demand into the economy by expansionary fiscal or monetary policy. In the theory of Phillips Curve, there might be a chance that a trade-off still exists, despite the UK economy approaching full employment, and also prices still remaining stable in the recent years.
When the government is solving the economic growth of a country, it may affect negative impacts to the stabilizing of prices, if the economy grows too quickly through a fiscal or monetary stimulus of the aggregate demand, the aggregate supply may not be able to respond, and the prices may be driven up.
Imports spending are stimulated relative to export revenue, as an economy grows. The government when using the policy has to be aware that ‘dash for growth’ may lead to balance of payments problems. This can cause a problem to the balance of payment in the government’s objectives, when trying to solve the economic growth.
A crowing out affect may happen between the private sector and the public sector. Example, a public sector is trying to borrow to compensate market failures and provide the public merit goods, this might driven up long term interest rates and causes private sector to crowd-out. Hence, the desire to achieve short-term stability may risk to the prospects of a long-term growth.
ReplyDeleteThe rise of globalization means that economic shocks from one part of the world can quickly spread throughout the global economy.
The interconnectedness of the global economy may create problems for domestic policy makers, as the source of unemployment or inflation may be the global economy, and outside the control of the domestic governments. Many argue that automatic shock absorbers, including progressive taxes and benefit, flexible labor markets, and floating exchange rate are critical for the success of a country actively participating in the global economy.
If a government is trying to achieve a flexible economy, which copes with globalization, the distribution of income may widen. Example, a flexible economy may be partly achieved by having flexible labor market, but to achieve this, there might be an increase in part-time employments, and a reduction in job security and worker protection. However, it also can be said that in a long-term, the reduction in unemployment maybe associated with the flexibility more than that compensates for a rise in part-time job and work insecurity.
Measures to increase aggregate demand during an economic recession might raise output and employment in a country but may boost consumer demand for imports and therefore make the balance of international payment less favorable. Faster economic growth in the national output may also create more pollution and waste, conflicting with any environmental objectives.
Similarly raising interests or taxes rates, and cutting public expenditure to reduce price inflation by lowering the total demand, may result in lower output and more unemployment. The impact of higher taxes and lower public spending may also fall heavily on people on owner incomes in the economy especially if welfare benefits to people who are unemployed or on low incomes cut back.
In conclusion to what I am explaining above, I do agree that both the monetary and fiscal policy are acting like they are a double edge sword if used by the government mistakenly, meaning, if you solve one of the problems and making it “too advance”, government might risk another objectives, causing the other to fail. Sometimes it may end up as a cycle, solving the other, failing the other, and later it will rise back to the first solved problem, making it failing. However, it will be very useful to solve the macroeconomic objectives using the fiscal and monetary policy wisely.
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Reference:
Economics Book
http://www.economicsonline.co.uk/Managing_the_economy/Policy_conflicts.html
Notebook
Fiscal and monetary policy instruments are used by government to affect the economy of a country. These instruments can affect both demand side and the supply side of an economy of a country. The fiscal policy instruments includes: public expenditures and taxes. These policy instruments are all controlled by the government. The monetary policy instruments includes: interest rate. These policy instruments are all controlled by the central bank of a country. All of these policy instruments are used by the government to achieve the four main macroeconomics objectives which are : high and stable employment, low and stable inflation, high and sustainable economic growth , and a stable balance of payment in the international trade. All of the policy instruments can be use to help improve the economy of a country but also can cause drawbacks when they are not properly and wisely used by the government. For example:
ReplyDelete1.Policy conflicts
The macroeconomics objectives of a government can be prove that they are difficult to achieve all at once because the aim of policies might conflict. For example, some policy measures to reduce unemployment and boost economic growth but can also result in higher rates of inflation. Measures to increase aggregate demand during an economic recession might raise output and employment but may also increase the demand for imported goods and hence make the balance of international payments less and decrease the economic growth rate of a country.
2. It is also difficult for a government to know precisely how much to expand public spending or cut taxes to improve the economy. Increasing aggregate demand by increasing public spending or by cutting taxes can help increase the economic growth and the level of employment of a country. It can also help low-income family to buy goods and services they need. But this can also cause the economy to “overheat” which means that the level of prices will increase because the demand expands faster than the aggregate supply of a country.
3. To finance an increase in public spending and a cut in taxes, a government may need to borrow the extra money needed from private sector firms. But the more money the government borrows from the private sector firms , the less the private sector firm has to spend for itself. This may help increase the aggregate demand of a country and hence helping the country to increase employment and increase the economic growth rate of a country but private sector firms don’t have enough money to invest on labor and machinery even if the price has been lowered since the money is borrowed by the government.
4. Government can increase taxes on incomes and profits to reduce inflation by decreasing aggregate demand. But if taxes are too high, people and firms may reduce their work effort. This is because they will get lower income even if they work hard due to the income and profit taxes. This will reduce labor productivity, total spending and profits. As productivity falls the cost of production will increase and they will be less able to compete in the market. As a result, the demand for local goods will decrease and unemployment may rise.
ReplyDeleteBut this is not always the case. The policy instruments can cause drawbacks when the economic condition of a country is bad but it will not cause a significant effect to a country with a good economic condition. For example:
1. It is said that measures to increase aggregate demand during an economic recession might raise output and employment but may also increase the demand for imported goods and hence make the balance of international payments less and decrease the economic growth rate of a country. But if the quality of local goods is better than the quality of imported goods, people tends to buy local goods rather than imported goods. This will cause the economic growth rate of a country to increase because the money will still circulate in the country rather than the other countries and it will also not decrease the balance of international payments of a country and hence there will be no drawbacks.
2. It is also said that increasing aggregate demand by increasing public spending or by cutting taxes can cause the economy to “overheat” which means that the level of prices will increase because the demand expands faster than the aggregate supply of a country. But if the expansion rate of the aggregate supply of a country is the same as the aggregate demand then the price of goods will still be the same.
In conclusion, fiscal and monetary policy instrument will also give drawbacks other than benefits to the economy of a country if it is not properly and wisely use by the government and if it doesn’t have a good preparation or plan first.
Reference: Economics book
Originality: 90%
First the macroeconomics objectives are low and stable inflation, high and stable employment, high and stable economic growth and sustainable and manageable BOP (balance of payment). Second policy of instruments is divided by two it is demand side policy instruments and supply side policy instruments. Demand side policy instruments include fiscal and monetary policy, while supply side policy instruments include incentives to produces (selective), subsidies to consumers (selective), rules and regulation, PSE, labour market and educaton. lets discuss about the fiscal and monetary policy.
ReplyDeleteFiscal and monetary bring an advantages because it can make the unemployment low which means the employment is high, it can also control the balance of payment which means they control the export and the import and make sure that the export is more than the import. Beside that the advantages of fiscal and monetary policy is low inflation and political independent. Let me discuss some, low inflation is one of the goals of monetary policy, well inflation can reduce the purchasing power of the money and also the harming of the economic growth. In contrast, stable prices also enable household and other business to make financial decisions without worrying about sudden and also unexpected price increases.
but if we do not use it carefully and properly it can result very bad, first, it is conflicting goals. Conflicting goals means the federal reserve and other central banks can use the monetary policy to achieve the low inflation in the long run term and effect economic output and employment in the short run. The federal reserve bank of san fransisco reports that this goals sometimes make a 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. Another disadvantages is cumbersome to use, means it is hard to use maybe because the rules and regulations is hard to use and also they are complicated to use so that people is difficult to use it. Second is higher taxes, if they have higher taxes means the lower level of people will have to pay bigger taxes, if that is the case means they have a low purchasing power means the economic growth can go down. Third, slow reaction times, fiscal policy can be slow to react with the economic conditions. This is because the setting of fiscal policy in a government often involves the multiple decision-making bodies with different political agendas and schools of economic thought. The debate this convergence of opinion causes slows down a government's response to a potential economic crisis, which allows the problem to be worsened. The delay in action may also blunt a government's effort to control economic problems because fiscal policy actions take longer to show positive economic change.
ReplyDeleteSo here are the conclusion of the overall are the fiscal and monetary policy has an advantages and disadvantages, the advantages of the fiscal and monetary are good because it can solve the macroeconomics objectives of the government. Well but if we don’t use it carefully and properly it can result in very bad, such as it was cumbersome to use, expansionary fiscal policy that can lead to inflation and many other else.
References:
- Notebook
- Textbook
- http://www.ehow.com/info_8545944_advantages-disadvantages-fiscal-policy.html
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There are four main macroeconomic policy the first is a low and stable inflation, second is a high and stable employment, third is a high and sustainable economic growth in national output, and the fourth is a stable balance of payment. In a country government must take some measures to achieve the main objectives that they need to achieve. To achieve all the objectives the government can sets two policy instruments. The policy instruments is demand sides policy instrument and supply side policy instrument. Demand policy instrument will be used to manipulate aggregate demand in an economy which means it is used to raise the demand. And for supply policies usually they will be used to raise outputs and employments. Demand side policy instrument is related with aggregate demand and the supply side policy instrument is related with aggregate supply. In demand side policy instrument it will involve fiscal and monetary policies to achieve the demand objective. Fiscal policies instrument will involve varying the overall public expenditure and taxation in an economy to increase or decrease the aggregate demand and to influence the level of economic activity. There are two types of fiscal policy instrument a expansionary fiscal policy and a contractionary fiscal policy. Expansionary fiscal policy is when government wants to increase the aggregate demand in an economy to increase employment and output the government can increase its expenditure or reduce taxation to control the aggregate demand. A contractionary fiscal policy used to reduce pressure on prices in the economy to manage the demand of customer by cutting aggregate demand by doing reduction in public expenditure or the government can rise taxation. The problem with fiscal policy instrument is that fiscal policy is cumbersome to use, when there is an increase in public expenditure it will crowds out private spending, by increasing taxes on incomes and profits it can reduce incentives to work and enterprise, an expansionary fiscal policy can creates inflation. Monetary policy will involve with changes in money supply or changes with interest rate. In an economy to influence the level of aggregate demand they can use two policies. The two policies are expansionary monetary policy and a contractionary monetary policy. Expansionary monetary policy will make changes in interest rate and money supply. It can caused a reduce in interest rates or increase in money supply to increase aggregate demand. Contractionary monetary policy will involves increasing interest rates or reducing money supply to reduce aggregate demand when the economy is too much or too high. Supply side policies instruments are applied to increase productive potential of an economy and to increase aggregate supply of goods and services. Supply side policy instruments will include first a selective tax incentives, second a selective subsidies, third improve education and training, fourth labor market reforms, fifth privatization. Usually, these two policies will be used to stabilize the economic system in a country.
ReplyDeleteBy fiscal policy, government will actually try to create a high and a stable employment rate by increasing demand so the production will increase and the economy of that country can grow and the country will be stable. Especially if it will be done when economic recession period . it could increase outputs and it can reduce unemployment. This can be combined with monetary policy instruments which can reduce tax so they will have a higher spending ability and this also will affecting in the production level as the people have ability to buy, so the demand for goods and services will increase. Through this monetary policy, the savings and loan rate will be lower and people will take loan from banks to start making businesses. Some take this loan to start a business and some to enlarge their business. But aside from the policies they take, government will also need to consider other measures as well. Some other measures that government shall consider is export and import rules and regulations as well as the limit amount of goods and service to be exported and imported. Other than that , the regulations of bank loan will need to be improved as the people can take bank loan irresponsibly and for unclear purpose that can caused negative effect to the country. This rules and regulations in all these sectors must be clear and strict so it can support the fiscal policies instrument and monetary policies instrument that the government will takes to make sure that these policies can support the government so the government can achieve its objectives. So this fiscal and monetary policies will be double edged sword if the government does not support some tools of regulations and also does not control properly.
ReplyDeleteReferences:
- Text book
- Note book
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Vincent Cia 8B
In certain cases, different objectives may have opposite methods of policies applications. For example when government use policy A, for objective A and C, it will be successfully achieved. But could be because of policy A was applied, objective B and D could be facing failure. So if government really focusing to achieve certain objective, then it could be harmful for a country because government succeed one objective but destroy another objective because of not wisely using either fiscal or monetary policy instruments.
ReplyDeleteAn example that may correct the topic of discussion is such as when government would like to reduce inflation, they increase the tax as high as possible which they think by doing that, aggrigate demand will decreased and so that price of products fallen which may lower and making the inflation back to be stable. However, because government increase too much tax in order to achieve its one of four basic objectives, stabilizing inflation, market productivity will decrease because supplier decrease much in producing goods because of production’s input or raw materials are cost so much, so that national economic growth, which could be resulted from total productions current year minus total production last year, the number of national economic growth could show negative or decreased. Beside it is badly affecting national economic growth, number of criminals and unsafe factors may increase because now after government increase tax so much lesser people will be able to buy the goods.
But if government use and applied their policies wisely such as not too focus on an objective but regularly change their policies applications in order to make all objectives to be successfully achieved.
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DeleteResource : Cornell Notebook
Macroeconomics is the study of how a national economy works. It involves understanding the interaction between changes in total demand and output and national income, also employment and price inflation in an economy. While microeconomics analyses the market behaviours of individual consumers and producers and how market works. There are 4 main macroeconomic objectives set by the government to help them improve the economic of the country. It includes : 1) low and stable inflation 2) high and stable employment 3) high and sustainable economic growth 4) stable balance of payment and regulating international trade. In order to help achieve thier objectives, there are 2 types of government policies which really helps, they are fiscal policy and monetary policy. Basically, fiscal policy is the use of government’s taxation in an economy to manage aggregate demand and influence the level of the economic activity. While monetary policy involves changes in the money supply and interest rate in an economy to influence the exchange rate of its national currency against other foreign currencies to affect the level of international trade and transactions.
ReplyDeleteFiscal policy is the use of government’s spending and their taxation which is use to influence the economy. When government decided to purchase goods and services, the transfer payments and tax collected, they are all engaging in the fiscal policy. Discussions of fiscal policy generally focus on the effect of changes in the government budget on the overall economy. Fiscal policy is said to be tight or contractionary when the revenue or sales is higher than the spending and loose. It is said to be expansionary when spending is higher than revenue.
Advantages of fiscal policy :
1) It can significantly impact the national income and can therefore have immediate effect on the economy. Also, taxes on negative externalities can decrease consumption of negative externalities or demerit goods. Same like subsidizing merit goods or public goods which will increase the consumption.
2) The tax cuts on wages encourages people or employers to work and therefore, shfit the long run aggregated supply curve to the right.
3) Different rate of taxes on different levels of the income can reduce the gap between the rich and the poor. Not only controlling aggregate demand, fiscal policy in long term can also benefit the society in may different ways.
Disadvantages of fiscal policy :
1) It is inflexible. Changes in direct taxes or government spending may take lots of time because of both political and moral reasons. Like for example : taxing rich people more than the moderate might bring unfairness for them.
2) Another problem can rise when trying to solve the other. Like for example : stimulating aggregate demand to decrease the demand-deficient unemployment may worsen the inflation because the right shift in aggregated demand will cause a rise in the price level.
Monetary policy is maintained through actions like increasing the interest rate of the market, or changing the amount banks need to keep in the vault. The actions are made by the central bank. Monetary policy itself is the process by which the monetary authority of a country controls the supply of money, it usually targets a rate of interest for the purpose of promoting economic growth and stability. It also provides insight into how to craft optimal monetary policy.
ReplyDeleteAdvantages of monetary policy :
1) Low Inflation – 2 goals of the monetary policy are to maximum sustainable levels of economic output and maintain a stable price. Stable price means keeping inflation low. Low inflation is all that monetary policy can be able to achieve in the long run. Inflation helps reduce the purchasing power of money, also harming economic growth.
2) Political Independence – when central banks operate free of political pressure, they are free to make policy decisions based on economic conditions and the best available data on the economic performance, rather than the short term political considerations imposed by the elected officials or political parties.
Disadvantages of Monetary Policy :
1) Conflicting Goals – Central banks can use monetary policy to achieve low inflation in the long run and affect the economic output and employment in the short run. These goals sometimes cause conflict. Like reducing interest rates to expand the money supply and stem rising unemployment rates during a recession.
2) Time Lag – Monetary policy actions takes time to work their way through the economy of the country, and especially a large modern economy such as the U.S. and otherworld economic powers.
So, in conclusion, I think both monetary policies and fiscal policies are affective in thier ways, they helps alot for the government to achieve their objectives. And both of course have their own disadvantages and have their own impacts to the country.
References : book, notebook, http://en.wikipedia.org/wiki/Monetary_policy http://www.ehow.com/info_8239910_advantages-disadvantages-monetary-policy.html
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Regina Tanugrah 8B
The government has various objectives but their major ones consists of 4 major aims, which are low and stable inflation, high and stable employment, a high and sustainable economic growth, and a stable balance of payment and regulating international trade. To achieve these goals, the government is given policy instruments in which they are able to utilize in order to ease their task.
ReplyDeleteThese policy instruments are divided into 2. Demand side policies and supply side policies. For this case I’ll only discuss the demand side policies. These policies are able to influence the factors in the aggregate demand which includes C + I + G + (X – M). That stands for household consumption + firms investment + government expenditure and lastly export minus import. The demand side policy consists of fiscal and monetary policies.
Firstly, there is the fiscal policy, which is composed the public revenue, public expenditure and borrowing/debt services. The public revenue is made up of taxes, fees, profit, and also disinvestment. The taxes are divided into 2, which are direct and indirect taxes. Direct taxes are the taxes that are paid directly in the income to the government that includes wealth tax, house tax, property tax, corporation tax, and also gift tax. But for the indirect taxes they are paid indirectly such as for service tax and also sales tax and VAT.
As for the fees they come from the government facilities that the citizens need to pay for such as a birth certificate, a license, a death certificate, etc. Profit comes from the PSE (public sector enterprises) that are only Public Corporation whose dividend is then given to the government. Disinvestment is a different case, it is when a company or a firm goes private (privatization) or goes bankrupt. It may also be a penalty for breaking a law or when we catch smugglers that are sneaking into the country with illegal stuff (drugs, etc)
Then there is the public expenditure; this is when the government spends money. The money is spent for various reasons such as capital expenditure, new investment, developing the country’s infrastructure, the current expenditure (daily expenses),the public goods (lighthouses, free software, etc), and also merit goods (education, healthcare, national insurance, etc), defense (army, etc).
Then there is the monetary policy in which controls or regulates/manages the central bank. This means that they control everything ex. the interest rates. Hence these instruments are very useful for the government since they are able to stabilize the market when overheated using their contractionary fiscal and monetary policies and also to speed up the market using their expansionary fiscal and monetary policies.
The definition of contractionary fiscal and monetary policies is instruments used by the government, which may be fiscal (tax related) or monetary (interest rates related), to slow down an economy. This may be able to stabilize an overheating economy, by increasing the tax and interest rates, the government unconsciously encourages the citizens to save more and spend less hence the economy will slow down and inflation will fall.
ReplyDeleteOn the other hand there is expansionary fiscal policy, this policy is used when the economy is too slow and inflation is really low along with the economic growth rate. So in order to boost up the economy the government uses the expansionary fiscal and monetary policies in which they drop the price of the taxes and interest rates hence the aggregate demand will go up and people will buy more hence increasing inflation and economic growth.
These are the advantages of the fiscal and monetary policies both expansionary and contractionary, they help the government to stabilize the economy and also simultaneously helping them achieve their goals. However there is a downside to these instruments as they also have disadvantages.
Firstly for the fiscal policy, it is very cumbersome to use. Since the market is unpredictable the government cant suddenly increase the tax so high just to cool down the market. If the government set them too high hence it may result in unemployment one day. Then they also have a crowding out effect which results from a situation in which the government drop the taxes so low that the funds aren’t enough for expenditure that they have to borrow from the private sector. As they do this the private sector will have less amount of money to spend hence the country wont develop as much, and the government will one day have to increase the tax so high that it will cause the country into poverty.
As for the monetary policy, it’s disadvantages includes the fact that it is not effective during a recession, it isn’t good in deflationary situation (ex. Falling prices, no possibility of negative interest rates, etc), they also take a long time to take effect. Not only that but their high rates may affect investment and aggregate supply.
So to conclude my essay I think that yes both policy instruments, fiscal and monetary policies, are double-edged swords since they both have their advantages along with their disadvantages hence they may be helpful for the economy, to stabilize it. However if the government abuses the authority they have over the policies they may worsen the economy thus adding more obstacles and problems for the government to handle.
Charlene 8B
Reference:
- Notebook
- http://www.economicsonline.co.uk/Managing_the_economy/Monetary-policy.html
- http://www.investopedia.com/terms/c/contractionary-policy.asp
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Government has 2 kinds of instruments when running the country. The macroeconomy has objectives to complete, there are many objectives, but there are 4 main objectives that are the most important, which means when these objectives are achieved, the country will be prosper and might become MEDC, cause most of countries which has objectives of low and stable inflation, high and stable employment, high economic growth(high national income), and positive balance of payment as their main objectives is LEDCs countries, but it doesn’t mean that the MEDC don’t have objectives to complete, they also have problems, which is to sustain their condition, and they have different objectives for that. During different circumstances, government use different instruments, which are fiscal policy and monetary policy. First, fiscal policy consist of public revenue, public expenditure, and public borrowing/debt service. And monetary policy is the policy who controls the money, the supply of money, and the one who target the rate of interest for the sake of increasing economic growth and the stability of the country. And then government has 2 types of policy instruments, which are demand side policy and supply side policy, demand side policy consist of contactionary fiscal and monetary policy and expansionary fiscal and monetary policy, both of them controls the aggregate demand(final demand for goods/services in a certain time). Government use contractionary fiscal policy during the prosperity time, its function is to decrease the aggregate demand, while expansionary is used during the recession time, its to increase the aggregate demand. Fiscal policy, compared to monetary policy is more effective in achieving the objectives, fiscal policy acts like : when the government wanted low and stable inflation, and there are a great power of money, which means may people have many money to purchase goods and services, if this keep continuing, inflation can happen because companies thinks “more demand->higher price”, and to prevent that, government increase taxes, so people will tend to save more compared to expense more, and by putting higher tax on rich people, government will earn more public revenue, which can increase economic growth and then government can upgrade the standard of living among the area, and will also help the poor people.
ReplyDeleteGovernment is important in a country; they are the system that governs the state or area. The government, of course, would have objectives the want to fulfill, that are, low and stable inflation, high and sustainable economic growth, high and stable employment and lastly, a stable balance of payment. To achieve them, the government can implement policies, there are fiscal policy and monetary policy. These policies are the ones that can affect the economy of the country.
ReplyDeleteThe fiscal policy is the use of taxation, the government expenditure is used as well to control the aggregate demand. When taxes are increased, there would be a shift in the aggregate demand because in taxes are imposed on certain goods, the prices would increase. This would be good when the country is in recession, they increase demand to accommodate the supplies. But on the other side, if this is implemented during prosperity period, the implementation of fiscal policy would boost the demand more and increase inflation which could result in hyperinflation. The use of fiscal policy help the national income, which has an immediate effect on the economy, when taxes are imposed, this reduces the gap between the rich and the poor. Like everything, all things have their disadvantage, and fiscal policy’s are that it’s inflexible. Increasing taxes could also discourage workers to work. This might also contradict with the government’s other objectives, for example, when we want to stimulate the demand in order to decrease the low rate of employment, may worsen inflation because it can cause the rise in price. In opposite, if inflation is wanted to be reduced, unemployment might increase.
Monetary policies are policies controlled by the central bank, they control the interest rate. The implementation of monetary policy take a longer time to issue, they are the policies used in the long run (supply side instrument). They help in lowering the high inflation. But as they take a longer time to be implemented, those in needed for the shorter term policies would be in a disadvantaged.
In order to conclude on what has been stated above, all the policy instruments has their pros and cons, it is just how the policy is implemented in accordance to the situation happening in the country at the moment. If the policy that is implemented, to solve the problem, contradicts with the objective needed to be reached, there might be a chance that the problem might explode to a wider scale.
Originality: 90%
Reference:
Notebook
Textbook
Grace - 8B
Fiscal and monetary policies are demand side policies. They are policies that affect the aggregate demand of the country. Aggregate demand is the total consumption added with investments and the difference between the country’s import and exports total numbers. Fiscal and monetary policies are always effective at helping the government to achieve the 4 major objectives. They allow a change in the demand of the country. Fiscal policies involves government expenditure rates. While monetary involves the money supply of the country and determined by the central banks of the country.
ReplyDeleteWhen done naturally demand side policies can in fact work to hate a negative effect. For example an increase in the country’s money supply will sure increase aggregate demand as people can buy more, meaning suppliers will produce more, and to do that they will hire more people. Which goes with the high and stable employment rate. But if done like this eventually there will be increase inflation, because the more resources hired means increased cost, which means increased price.
But when done with good supervision by the government all the problems can be avoided. In increasing the money supply it will cause inflation, but the problem can be avoided if after increasing it, the government decreases it back to the original causing a good employment but reduction inflation rates.
So to conclude what I have discussed, fiscal and monetary policies can work double sided but when supervised the problems can be avoided.
References
notebook
originality rate: 100%
According to a lot of general knowledge people or average people in other means usually know about policies, fiscal policy and monetary policy, they do also know that macroeconomic objectives of a government can prove difficult to achieve all at once. In some cases policy aims might conflict. But they don’t know that actually when those 2 policies were mistakenly applied in the economy, they don’t end up correctly fixing the problem, but instead they will be a boomerang / a double-edged sword to stab back and may end up not being better, but end up proving it is more harmful for the country. So, in this discussion I am going to show how I agree with this situation I define in the section above.
ReplyDeleteOne of the fiscal policies is by borrowing. You can borrow to firms like the World Bank, IMF, etc. But normally if you can’t return it, interest will come and the interest will be so high it can effect to economy failure. Since by increasing owes, economy goes down and to stabilize it, the inflation will be so high that it will be a hyperinflation. Firms can’t survive, and so do people, they can’t survive this epidemic. For example is The Lost Decade (失われた10年) (Ushinawareta Jūnen) that occurs in 1991 until the 2nd millennium, 2000. What happens in the The Lost Decade is that Japan has an agreement with France, UK, Germany and the US called the 1985 Plaza Accord creates rules of exceptionally high land values and low interest rates causes massive borrowing and heavy investment in stocks. Since this bubble of epic investment is unsustainable. The Bank of Japan sharply increased interest rates, what happens then is that a lot of Japanese banks had super high bad debts. Many people, banks, companies fail and they need to borrow from loan sharks for money. Next is that the country used over power in trying to stabilize. Accidentally they used extra power in the effort to stabilize, so it became unstable.
The second type of fiscal policies is public expenditure. Public Expenditure is mostly expended for the public goods and merit Goods. Some government legislative like the ministers, like to corrupt, due to that public expenditure such as Capital Expenditure, Developing Infrastructure, Day to Day Expenses, Public and Merit Goods and Defenses. SO funding for that sector will decrease, people will suffer and a good plan to improve the country will end up in genocidal of securities.
Originality: 97 %
Fiscal policy is changes in the taxing and spending of the federal government for purposes of expandiing or contracting the level of aggregate demand. In a recession, an expansionary fiscal policy involves lowering taxes and increasing government spending. In an overheated expansion, a contractionary fiscal policy requires higher taxes and reduced spending. According to Keynes, a recession requires higher taxes and reduced spending. According to Keynes, a recession requires deficit spending while an overheated expansion requires a budget surplus. Monetary policy is under the control of the federal reserve system ( our central bank ) and is completely discretionary. It is the changes in interest rates and money supply to expand or contract aggregate demand. In a recession, the Central Bank will lower interest rates and increase the money supply. In an overheated expansion, the Central Bank will raise interest rates and decrease the money supply.
ReplyDeleteInteraction between fiscal and monetary policies to facilitate the attainment of macroeconomic objectives has been a central as also one of the more complex relationships in theory and practice across various countries.
These are the advantages and disadvantages,
Advantages :
1. In a country with a large budget deficit, it makes sense to use fiscal policy for reducing any inflationary pressure. Because you can reduce inflation and the same time improve the budget deficit.
2. Raising interest rates is usually quite effective in reducing inflationary pressures ( though there may be time lags, especially it confidence is very high ).
3. Raising interest rates also has an effect on the exchange rate. Due to hot money flows, the Pound is likely to rise. Therefore, deflationary monetary policy will have a greater effect on exporters.
4. Also raising interest rates has a bigger proportionate effect on homeowners with variable mortgage payments. The high level of mortgage payments, means the UK is sensitive to interest rate changes. However, higher interest rates can be beneficial for savers who will gain a higher income.
5. Therefore monetary policy doesn’t have an even impact throughout the economy; borrowers and savers will be effected differently.
Disadvantages :
1. Raising taxes may affect incentives in the economy. Lower spending may adversely affect public services. It can be difficult to cut public spending for reasons of fiscal demand side management.
2. In some situations, monetary policy may be insufficient. In the recession of 2008 – 2009 there was a liquidity trap.
3. Banks had insufficient credit so were unwilling to lend despite low interest rates.
4. Confidence was very low
5. House prices were falling reducing consumer wealth
Higher income tax rates might have a negative effect on work incentives and the willingness of people to start new businesses. Some critics of the new top rate of tax of 50% ( introduced in the UK in 2010 ) have claimed that it may lead to a ‘brain drain’ effect with some top-income earners moving overseas to avoid higher taxes.
ReplyDeleteSuccessive increases in the real value of the minimum wage might lead to higher operating costs for labour-intensive businesses such as restaurants, hotels, catering, cleaning and security companies and this could lead to some job losses – conflicting with an employment objective.
Greater use of means-tested benefits is often a good way of targeting welfare assistance at those families who need it most. There can be a danger that means – testing might increase the risk of a ‘poverty trap’ effect where people face disincentives to work longer hours and earn extra income, firstly because they pay income tax and national insurance and secondly, because they stand to have their means – tested welfare taken away as their gross income rises.
In conclusion,
Fiscal policy important in understanding the working of monetary policy.
Budget deficit can force monetary policy to monetaize debt.
Policy conflict over different objectives can produce sub-optimal outcomes.
Coordination between policy instruments made more difficult by independence of Central Banks.
In crisis time coordination more important ( Europe Fiscal Crisis, US unemployment problem, South Africa growth strategy ).
Originality : 90%
References :
http://www.nviegi.net/teaching/lec11.pdf
http://www.rbi.org.in/scripts/PublicationsView.aspx?id=14938
http://faculty.etsu.edu/hipples/fpvsmp.htm
http://www.economicshelp.org/blog/2253/economics/monetary-policy-vs-fiscal-policy/
http://tutor2u.net/economics/revision-notes/as-macro-policy-conflicts.html