Eco 372 - Major Debates over Macroeconomic Policy

Major Debates Over Macroeconomic Policy

Valery F. Long

ECO/372

August 14, 2017

Daniel Puente

Major Debates Over Macroeconomic Policy

People and critics alike have their own opinion on whether increased government spending to help with the recession and the government having to follow a balanced budget, does it help or does it hurt the economic growth? Over the past few decades the people have had some serious recessions like the Great Depression and some that was not as bad in which economists have come up with ways to help the economy grow, like asking for an increase in government spending can help stop a recession or have a more balance government budget where there are restrictions on what and how much the government can spend.

The agendas of the fiscal and monetary policies are similar.  They are both used to:

• Keep inflation down (inflation target of 2%).
• Maintain a positive economic growth (close to long run trend rate of 2.5%).
• Aim for full employment.

The main focus of the fiscal and monetary policy is to reduce cyclical fluctuations in the economic cycle. Most times it is inflation targeting which is stressed the most for monetary policy.

• The fiscal policy involves the changing of government spending and taxation. It involves a change in the government’s budget plan. Expansionary fiscal policy involves tax cuts, higher government spending and a bigger budget deficit.
• The monetary policy has to do with the influencing demands and supply of cash, primarily through the use of interest rates. Monetary policy can also have an unorthodox policy like an open market operations and quantitative easing.

How does a fiscal and monetary policy work?

Monetary policy is usually carried by the Central Bank – Monetary authorities and has a set base of interest rates (e.g. Bank of England in the UK and in the Federal Reserve in the US). The Central Bank likes to keep the inflation rates to around 2%. If they see inflation going up above the 2% mark, they will increase their interest rates. With higher interest rates the increase of borrowing costs, it reduces personal spending and investing. If the economy went into a recession, the Central Bank would cut interest rate.

     Monetary policy is the management of interest rates and the total supply of money in circulation. The Federal Reserve is in charge of managing parts of the Central Banks. Monetary policy is used to boost the economy by encouraging people to spend money. By doing this, it puts money back into the business that is putting the products out that people buy every day. Companies will borrow money from banks to keep their business going. The Federal Reserve helps maintain control over the money by buying and selling bonds; they also set the reserve ratio; this is the money that the bank has to keep on hand and not lend it (“Reserve Ratio”, 2016). Another way the Federal Reserve controls the money is by setting the discount rate, or interest rate change to the borrowers (“Discount Rate”, 2016).