The Effectiveness of Fiscal Policy - Essay Example

The Effectiveness of Fiscal Policy between the Neo-Keynesian and the Monetarist framework In the recent past, many scholars and authors have shown interest in macro and microeconomics due to the diversity of the field. Macroeconomics comprises of taxation, economic shifts, monetary and fiscal policies, interest rates and the stimulants of success in a given country compared to others. On the other hand, microeconomics entails of consumer behaviors, production, market equilibrium, factors affecting the markets and government practices that affect the markets. (Bishop 32).The two variables directly influence each other, for instance taxes imposed by governments on products reflect directly on the prices thus affecting the consumer who comes under the microeconomics bracket. Fiscal policies affect the demand and supply patterns in an economy, if the government imposes heavy taxes on various commodities the consequences are that prices will increase and demand will be low. If such a trend continues, supply will reduce and eventually the company will quit the market if not shift its concern to another line of production and this will result to retrenchment processes and low-income rates to the losers (workers). At the long run, the government will observe a lower G.D.P (gross domestic product) and reduced income per capita (Dwivedi 17). If a government engages in operations that will see it maintain expenditures at a desired level, it will have practiced fiscal policies. The practice is effective through adjustments in taxes, interest rates and the spending styles of the government itself (Musgrave, Frank, & Elia 80). Through the practices, the government either helps the final consumer, but whether this happens as anticipated is dependent on the shifts that the government employs either to vary rates on increased or decreased edge. The policies show relevance to those of the monetarists. Neo Keynesian theory stipulates that the factors to a progressive economy revolve around demand. The factors are demand itself, produced output and the rate of employment. The theory argues that an economy enjoys stability when the factors are exercised but not to the maximum exploitation of its output. The rate of employment in a country increases income per capita. This stimulates demand since buyers are able to decide and make purchases promptly at their will. Increase in demand will lead to increase in price or supply accordingly. The simultaneous changes in demand and supply factors will result to inflation if the prices increase considerably (Satora and Richard 67). At this point, government intervention becomes a point, and therefore measures must put in place to create harmony among the factors, this is referred to as fiscal policies. In most cases, the government will borrow money from the economy by issuing premiums, it may also issue decrees to the lending facilities on a stab to minimize the amount of money in supply, and it may impose taxes and duties over the produce. The practices as well will reduce spending patterns leading to reduced production. Eventually jobs will be lost resulting to economic recession. Monetarists argue that whenever a country revamps money into the economy, chances are that growth is in the short-term, and the ultimate result will be the pressure of inflation. They state that a slight change in government policies will affect the market either positively or negatively and reflect at the short and long runs. It is during inflation that the entire consumer group will cut down on spending since prices are high. The country will face unemployment problem since suppliers will be quitting the markets. Entirely, the country will not pose an attracting site to the investors due to adverse currency fluctuations. Understanding that subsequent currency fluctuations will result to devaluation, the country finds itself in a rather bitter position as its currency will affect exportation of goods. Therefore, it will have set an economic sanction to itself (Bhanat-Ram 98). Neo-Keynesians disagree with monetarists that changes in the economy will see employment and inflation coincidentally increasing due to the perceived changes in the economy. While monetarists state that, a sense of inflation will lead to increased salaries to the workers and increased prices on the products, Keynesians observe that the company can reduce wages and workers will accept since their interests focus at the long terms effects. This way, the perceived inflation will not affect employment and prices as long as they are maintained. Arnold argues that all monetarists resolve that practices of economies to counter the effect of unemployment by use of money are hazardous and will injure the economy’s stability (41). As per their forecasts, whenever a country pumps up its economy with money, people and businesses realize the change faster than expected. Businesses employ more workers, which leads to increased output to meet the prevailing market demand. The demand arises from the increased consumer incomes; these aspects further stimulate price increment (Arnold 46). At the event of increased prices, the consumer, who entirely draws income from the business, will demand a salary and if the company is unable to do that, retrenchment process takes its due course. Eventually, demand and supply will fall since unemployment will have resulted to a fall in the purchasing behavior. The only aspect that will remain firm is the rate of inflation. Therefore, an emphasis is that governments should not use money to reduce unemployment but let the situation reshape solely. However, inflation may seem persistent; monetarists say that supply factors can be set strategically to make inflation imminent. They clearly state that increased supply reduce s chances of price increments. The point is that enough supply in the market will mean that the demand is satisfied accordingly, and the result is that there will be no price increments (Chauan 87). To ensure that supply curbs inflation entirely, the economy must employ proper fiscal practices; for example, employee trainings will equip them with knowledge hence increasing mobility of labor, reduced influence of labor unions on the prospective employees over pay rise, and the initiation of favorable regulations. Ultimately, the monetarists encourage that interest rates control; this will serve to reduce price fluctuations. Instead of revamping money into the economy, the government should consider funding operations and subsidizing operations so that output is increased (Thomas 10). According to Satora and Richard, most governments employ fiscal policies when trying to solve the economic crisis in occurrence or expected (102). The policies tend to set a controversial state when compared to the monetarists and neo-Keynesian theories. The policies establish the necessity of well-laid and established prices on goods. To ensure that the specific economy does not deteriorate, a government imposes tax cuts on incomes. This works out to increase consumer earnings, and therefore, they stand the opportunity to spend the increased incomes on buying commodities, which they were unable to purchase before. This mechanism disagrees with monetarists’ theorists that the economy reshapes naturally and supply is the factor to observe and not monetary factors. At times, the government anticipates a negative charge in the economy and immediately resolves to reduce all direct taxes imposed on its economic key players and more so the products. The result is that specific prices drop due to reduced taxes; this will attract demand from the consumer for instance, a person who felt deprived to buying a given commodity will find it possible to purchase the product at a much-reduced cost. The consumptions margins of the products increase simultaneously from the positive buying process. This automatically reshapes the general supply of the product and output maximization. By so doing, the government controls inflationary pressures and the economy stabilizes thereafter (Baumol, William, & Allan 77). The factor disagrees with the Keynesians, who argue out that in order to control inflation, reduction of employees’ salaries will limit their spending patterns, and therefore inflation will not pressurize the economy. Since a government seeks to maximize output, its policy disagrees with salary cuts for they will result to reduced demand and the general output of the product. It further observes that reduced output will force businesses to quit the market, and this will result to increased unemployment levels, a factor that reduces the G.D.P and incomes per capita. Every country depends on its production capacity to prosper, if a government finds that imposition of excess taxes to the firms injure its economy; a plan is set to ensure that economic growth occurs in tremendous turns to reach the target level. A reduction in corporate taxes may prove as a useful tool to stimulate the economy, the perceived result is that the businesses will maximize on their capital investments. This may occur through increasing of the general output and opening of new production plants. Consequently, more workers reduce the general rate of unemployment. Increase in the rate of employment will lead to an increase in incomes and the overall expenditure. At this point, supply reshapes and the general demand met. The policy disagrees with theorists who argue out that, in order to reshape the economy, governments must fund operations, which will ultimately ensure that all factors come to equilibrium. The point is that governments obtain money from loans, issue of premiums and printing more money. By so doing the governments will be obtaining from the economy for the economy, and the only perceived changes will reduce gross national product. Government’s controls should be inclined to the tendency of its currency. If the government perceives that there is a threat of inflation, it will urge banks to reduce taxes on savings; this will stimulate the rate at which particular individuals save for future use, it will thus enable the consumer to access and buy more durables and the factors of production on the lesser demanded goods will be stimulated positively. At the long run, the economy will enjoy stability as the market factors co-exist harmoniously at a point of equilibrium with a relative increase in employment at the high-end markets. On the contrary, theorists argue that governments should reduce the money in circulation through borrowing, issuing bonds and stickiness in the lending utilities. The theorists’ policy may work out, but other than inflation, there will be no positive change to the economic major factors. The practice will not improve the demand and supply levels; hence, the country’s output level will remain stagnant, and unemployment levels will remain a pressing issue (Froyen 45). Therefore, the fiscal policy differs from the Keynesians and monetarists theories since it aims to stir progression in the economy. The government, by allocating a favorable budget finances to enhance the general welfare of the society; it does so by offering pension schemes, unemployment benefits, and housing benefits among others. The economy grows consequently as the amount of money keyed into the market causes a positive change to the factors of production. When such income is in supply, jobs are likely to be created, and the outcome is that output will be maximized hence an increment in the gross domestic product. Arguably, the policy disagrees with the monetarists that when money plays as an economic stimulant, the result is inflation that tumbles the economic system completely. The policy stands out since whenever this practiced as it eradicates poverty levels to some degree and improves standards of living (Thomas 97). To boost the economy steadily, the government subsidizes the production of necessities such that the demand advances to the desired level through increased marginal consumption, which further calls for supply increases. On the other hand, Keynesians argue out that either product prices should not change by increment or decrement, as other market factors will tend to disagree (Sattora 78). The policy hence considers the monetarists pattern more, but on the other hand agrees to Keynesians that salaries remain constant, but the demand will have increased entirely. In conclusion, the idea that a government spends on the developing public utilities steers mobility of the factors of production. Businesses tend to reach the consumer faster to cater for demand. If the government caters for hospitals and educational facility, income levels will increase, as it will have saved consumers of unnecessary costs. The result is that consumers will stand the ability to make more purchases hence increased demand that will similarly increase supply. Fiscal policies tend to consider the Neo-Keynesians and monetarists theories accordingly to come up with sound decisions. Works cited Arnold, Roger A. Microeconomics. Mason, Ohio: South-Western/Cengage Learning, 2008. Print. Baumol, William J, and Alan S. Blinder. Macroeconomics: Principles & Policy. Mason, OH: South Western, Cengage Learning, 2012. Print. Bharat-Ram, Vinay. Interdependence of Macro and Micro Economics in the Global Environment. New Delhi: Centre for Policy Research, 2003. Print. Bishop, Sangeeta K. Ap Macroeconomics/microeconomics. New York: Kaplan, 2009. Print. Chauhan, S P. S. Microeconomics: An Advanced Treatise. New Delhi: PHI Learning, 2009. Print. Dwivedi, D N. Macroeconomics: Theory and Policy. New Delhi: Tata McGraw Hill Education Pte Ltd, 2010. Print. Froyen, Richard T. Macroeconomics: Theories and Policies. Upper Saddle River, N.J: Prentice Hall, 2009. Print. Musgrave, Frank, and Elia Kacapyr. Barron's How to Prepare for the Ap Microeconomics/macroeconomics Advanced Placement Examinations. Hauppauge, N.Y: Barron's, 2006. Print. Sattora, Richard. Ap Microeconomics & Macroeconomics. Piscataway, N.J: Research & Education Association, 2010. Print. Sattora, Richard. The Best Test Preparation for the Advanced Placement Examinations for Both Microeconomics & Macroeconomics. New Jersey: Research & Education Association, 2004. Print. Thomas, Lloyd B. Money, Banking, and Financial Markets. Mason: South-Western, 2006. Print. Read More