The Fiscal and Monetary Policy and Economic Fluctuations Introduction The government seeks to use public spending and taxation as tools for economic growth of the nation. Monetary policies of the central bank aim at regulating money supply in the country to influence the nation’s economy…
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Interest rates: The benchmark interest rate in the United States was last recorded at 0.25 percent Trading Economics (2013). It was more than 4% in the beginning of 2008, but settled at 0.25% at the year end. Since then, there has been hardly any change in the bank interest rate throughout the period of five years. (Annexure – I) Inflation: It could be observed from the data relating to ‘Inflation in US based on Consumer Price Index’ that inflation was at its peak in October 2008 at 3.655% and at 0.964% in October 2013. Inflation in US based on Consumer Price Index Year Rate of inflation October 2013 0.964 % October 2012 2.162 % October 2011 3.525 % October 2010 1.172 % October 2009 -0.183 % October 2008 3,655 % Source: globalrates.com (2013) Employment: Unemployment rate was at 6.5 in October 2008 reached its peak at 10 in October 2009 and is currently at 7.3% in October 2013. (Annexure – II) What is the nature of the changes and what are the reasons for the changes? It could be observed that all the indices were at its peak in 2008 around this time, that is five years before. Interest rate: Reduction in interest rates propelled consumption, consequently demand for the products. Maintaining interest rates at the constant level had its positive impact by keeping inflation under control as well as unemployment, because any increase in interest rates would have fueled inflation which could in turn affect employment negatively due to decrease in demand. Inflation: Inflation would be still under control when the economy recovers from high level of unemployment till full production potential is exploited in the economy. Inflation has become negative due to high unemployment noticed in 2009, but inched up subsequently as the economy grew and the unemployment situation eased. However, there is considerable improvement in the inflation front in the recent years due to effective monetary policies pursued by Federal Reserve, and it is expected to stabilize around the current levels. Unemployment rate: Increase in demand resulted in increase in production. This has created new demand for labor. The unemployment rate has started coming down from the beginning of 2011. What are the strategies based on fiscal and monetary policies that will encourage people to spend money in order to create economic growth? Fiscal policy: Government spending at the time of economic slowdown will increase employment. Multiplier effect will set in due to creation of employment opportunities in the economy, since it increases consumption potential of the people. The increase in aggregate demand caused in the process will attract new investments and thus create further employment opportunities. This cycle continues if the monetary policies are effective in avoiding overheating of the economy. Another important tool in fiscal policy of the government is taxation. For example, by lowering taxes money supply in the economy is increased. Lowering taxes along with or without increase in government spending will therefore be essential for revival of the economy, especially during recessions. Both government spending and taxation, the most important fiscal tools, will have long term impact on the economy. Decrease in government spending and reduction in tax rates could be more effective to avoid overheating in an economy. However, factors like huge accumulated budget deficits and precarious balance of payments position may
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The purpose of this assignment is to analyze macroeconomics basic concepts. This assignment is a review of an existing article titled EXCHANGE RATE REGIME TRANSITION DYNAMICS IN SOUTHEAST ASIA by Monzur Hossain. This paper has investigated the currency regime choices of six Southeast Asian Countries.
The fiscal policy indicates how the government attempts to realize revenue, spending and managing the deficit. The macroeconomic goals of a government include high levels of employment and business activity, stability in prices and distribution of wealth and promotion of economic growth.
The nominal Gross Domestic Product of the United States of America was approximated to be $16.62 trillion in the year 2012. This is almost one quarter of nominal global Gross Domestic Product. In addition, the country’s Gross Domestic Product at purchasing power parity is also the leading among any definite nation in the universe.
The tools have been described hereunder. Reduction in Taxes-The governments can opt for reducing the amount of taxes that are imposed on various products. This would not only help in capturing the entire business market, but will also enable effective demand stimulation at large.
(Farinha & Marques 2001). The government often employs fiscal policy, monetary policy or a combination of both to sway the economy back to an equilibrium position. The manner in which the government employs both policies may result to either fiscal or monetary dominance.
Monetary policy on the other side refers to actions that can be taken by the central bank to either slow or ignite the economy. Both Fiscal and monetary policies have a way of affecting the economy either positively or negatively. With reference to the
From the above discussion, it is quite clear that for any country to attain economic stability in the money supply as well as in the development of physical facilities; monetary and fiscal policies cannot be overlooked. In my opinion, governments must streamline the management of revenue collection authorities as a way of ensuring transparency and accountability in how the tax is collected and used.
Employers are adding jobs though they are low paying due to most of them being part time jobs. This is because the industries offering these jobs are the hotel, retail and healthcare industries and in most cases they do not offer full time opportunities
The inflation rate has gradually increased from an average value of -0.2 to 1.7 for the past five years. This has resulted because of the change in value of goods’ production costs and appreciation of the currency (Jaeger, 1999). The rate of
According to the discussion, Fiscal and Monetary Policy, the object of monetary policy is the stabilization of macroeconomic fundamentals, such as those relating to stable prices, stable growth rates for the economy, and the levels of employment and unemployment, with the ideal being full employment.
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