The theory of endogenous money - Essay Example

endogenous money theory based its arguments on classical economics, it proved a constructive attempt for providing alternative theoretical framework for dealing with unsatisfactory IS/LM model. As of now, policy makers are receiving utterly contrasting advice from economists concerning how to surmount the prolonged financial sprawl in the USA and Europe: a number of them propose austerity while others advocate for deficit spending. With this regard, this paper will seek to assess the arguments and the probable impact of both policy extremes in the light of the theory of endogenous money.

Fiscal austerity as well as fiscal stimulus brings about numerous impacts on the economy of a country, depending on the level or degree in which they carry out the redistribution of income to both the low and high earners. After the 2007/2008 economic slump, many nations continued to struggle with the view of reducing government debt levels. However, as time went by, it came to a point where the US and Europe’s governments accepted that they faced great level of government debts and as such, they ought to increase their revenue, cut their spending, default on their obligations, or thereof combine all of them.

Some policy makers recommend austerity because it is an intriguing option and rarely takes place on government debt even at times when the available solution is painful (Keen and Grasselli, 2012:3). In spite of the measure that default increases the future borrowing cost sharply, austerity leaves tax increased and the level of government expenditure cut. Fiscal austerity, in a number of ways, seems to be the contrast for of fiscal stimulus policies. This is so because it leads to tax cuts and increase spending applied by government at times whose purpose is to expand the country’s economy.

With reference to the endogenous theory, some policy makers seem to propose austerity due to its impacts. First, with austerity, low-income earners will be in a position to have