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Introduction to Macro-Economics: Fiscal and Monetary Policy - Admission/Application Essay Example


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Introduction to Macro-Economics: Fiscal and Monetary Policy

Hence, the fiscal and monetary policies are interlinked in relation to the economic structure and development. Monetary policy is maintained through measures like increasing the interest rates provided to the public or maintaining the total amount of bank reserves (Gupta, 2007). 2. The Federal Reserve policy makers and their tools Federal Reserve Board is the authority responsible for monetary policy of the U.S. The tools used by Federal Reserve Board are concerned with open market operations and the federal funds rate. Open market operations include government securities such as notes, bonds and also treasury bills. This method is very important as Federal Reserve Board uses it to single out and implement the policy changes (Lien, 2008). Federal funds rate is the fundamental policy target used by Federal Reserve Board. It is the rate of interest for borrowing U.S dollars that the Federal Reserve Board provides on the basis of its previous day’s closing rate against the US Dollars (USD). Any changes beyond this range during the day will invite the intervention by the central bank in terms of purchasing or selling of US Dollars (Lien, 2008). An expansionary monetary policy has an adverse effect on maintaining the balance of payments (BoP) whereas a contractionary policy intends recovering it. Fall in interest rate is a result of expansionary monetary policy but rise in interest rates are the effect of an expansionary fiscal policy (Cherunilam, 2008). 3. Keynes vs. Friedman There are key

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differences between the concepts propagated by Keynes and Friedman. Keynes considered the great depression resulted into the failure of the free market whereas Friedman had a different saying. According to Friedman, Federal Reserve had failed. Keynes believed in diplomacy for bureaucrats like himself but Friedman believed that the establishment of safe government was possible only by implementation of rigid rules. Keynes proposed that capitalism should be in shackles whereas Friedman thought it is beneficial to leave capitalism untouched (Skousen, 2007). 4a. President Obama, through the EPA, and with the agreement of the automobile companies, increased the mileage requirements for automobiles sold in the US. The decision taken by President Obama is not related to any of the fiscal or monetary policies. This is the situation of an attempt of upgrading the environment. This decision comes under the National Fuel Efficiency Policy which deals with the Environment Protection Agency (EPA) (The White House, 2011). 4b. For the past several years subsidies have been given for the production of corn based ethanol fuel. This situation is considered within the periphery of the fiscal policy. In this case, the decision taken by the government to provide subsidies for the production of corn-based ethanol fuel is intended to encourage the organizations. Subsidies are a benefit offered by the government to individual or particular groups. Subsidies are generally provided in form of reduction in tax or cash payments. Subsidies are provided by the government with an intention of development and to remove the unfavorable circumstances. In simple words, subsidy is the monetary aid provided by the government. 4c. Due to the nuclear crisis in Japan, inspections of United States nuclear plants are


Introduction to Macro-Economics: Fiscal and Monetary Policy 1. Fiscal and Monetary Policy and their differences With an intention of achieving the economic stability of the nations, governments have always taken in account various economic tools such as taxes, public spending, borrowing and debt management…
Introduction to Macro-Economics: Fiscal and Monetary Policy
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