Major Issues on Macroeconomics - Essay Example

Although the bullion decision was rejected by the parliament to quickly restore the gold standards, however, the debate of the bullion report influenced the decision of the parliament and the standards of gold were restored after the Napoleonic War. Even the full restoration in the standard of gold was not able to restore the monetary policy and a financial crisis occurred in every single decade, which was in 1825, 1836, 1847, 1857, and 1866. This disturbance in the financial system was due to the adoption of the new rule which was motivated by the idea that monetary disturbance is due to the failure of the fluctuation of mixed currency (gold and paper) at the rate it would have.

It was observed that the new rule implemented seemed to be misguiding. It evoked fear that maintaining the gold standards and converting the gold into banknotes alone cannot establish monetary stability unless there is a limitation imposed in the creation of notes by the banks (Rules v. Discretion, 2011).

Inflation targeting is the policy of the central bank in which the inflation rate is estimated by the bank and then this projected rate is made public by the bank. The actual inflation is then directed towards this targeted one by using the interest rates and other monetary tools. The inflation rate and the interest rate are inversely proportional to one another. Therefore the attempt of the central bank to change the interest rate is transparent because of inflation targeting.

Taylor rule on the other hand refers to monetary rules which are followed by some of the central banks, such as the US Federal bank. It forecasts how much the nominal rate must be changed by the center to divert from the targeted inflation rate, the actual GDP, and also from the potential GDP(HETZEL, 2000). This rule has more attraction than the “Inflation targeting” because it takes into account the deviation from the actual equilibrium level such as from full employment and the inflation rate which has an overall better effect on the economy. The Taylor rule also allows the interest rate to react with the variation in the output gap. Therefore the reaction in the output gap is the reaction in the nominal interest rate. This allows the central bank to observe the output gap for targeting the inflation policies(Inflation Targeting vs Taylor Rule, 2013).

Taylor rule has influenced the debate on monetary policies for the last two decades. Various suggestions are made by the Federal based on the Taylor rule. Federal Open Market Committee suggested that by increasing the basis points to 150, the fund's rate of the Federal may be increased up to 70 percent (ILBAS, 2013).

The statement seemed reasonable; however, the idea presented in the statement is vague. The statement can be considered true if the firm is defined in terms of its owner. The shareholder of any firm would be pleased with the increased dividend, they are aware of the fact that the increased dividend is directly related to the increased profitability of the firm.