Financial Crisis 2008 - Monetary Policy, Fiscal Policies, and Labor Markets - Essay Example

Introduction The issue of global economic hardship is a continuous process that had its start in the United s and later spread to parts of Europe since the year 2008. The crisis further spread to other economies of the world that caused significant impacts both in the short and long term states. The effects of national crisis continued to impact up to date. This is through a major transformation of hardship and the restructuring system of the global economy. The negative aspects recorded out of the crisis include the decline in the Gross Domestic Product. The decline had an effect in the agricultural sector that declined in the nature of production activities. The adjustment to these programs will have to be met and attained with prior effect to ensure an efficient running of the global economy (Peters, p5). The problem associated with the recovery panel is the time factor and the severity with which crisis had interfered with various sectors like the agriculture, macroeconomic objectives and the social welfare. The global trade volume decline will be evident. This is to both imports and export in view of the International Monetary Fund and the World Bank. The depreciating state of the world economies creates a condition of food insecurity. This creates a serious problem to the citizens of one’s country and exposes to dangers of food insufficiency. This will in turn lower the living standards. Global recession presents different effects in terms of the country linkages to the entire world economy. This is particularly true when dealing with issues related to the degree of each particular participant in the financial market in a global perspective. It is, therefore, essential to study fundamental attributes that aim to try and control and institute proper policies to deal with the 2008-09 financial crisis. This will involve the best combination of the monetary, fiscal, labor market polices to combat serious inflationary pressures and general economic stimulus ideologies. Global financial crisis of 2008-09 provides the best-case scenario through which finance provides a utility solution to the problem. It provides an elaborate way through which the entire system of accounting and finance put into task the realization of the future economic goals and gains. Various parameters apply both in the short term and in the long run to control the stalemate. The banking sector is also taken in to consideration concerning financing and payment services to control of the crisis. The global operation involves the element of importation and exportation of the entire goods and service delivery. It is a crucial aspect to see to it that proper business activity exists in the nature of these transactions (Khachatryan and Saito, p5). Keynesian philosophy is a complex business model whereby assumptions exist that aims to maximize the usefulness from any consumption and activities related to leisure. This is a subject matter of a given budget constraint. The Keynesian philosophy also contains some extensions to a significant shareholding characterized by a technological aspect with exogenous shifts in random. Monetary policies to curb the Financial Crisis The rationale behind the application of monetary policies involves the idea aimed at curbing inflation. This is as determined by the price stability and the real GDP compared with the potential real GDP (Mankiw, p8). The control in the inflationary levels proofs achievable through a limit in the aggregate rate and growth of the monetary policy. The reserve requirement controls the long run nature of inflationary pressures. The long run demand of money and performance in the rate of nominal GDP targets an equivalent measure of inflation. Other monetary aspects that used in the control of the financial crisis include the interest rate and the exchange rate system. The use of Federal Reserve mechanism uses a set of controls in the open market operation through treasury bills and bonds. There exists criticism based on the analysis of monetary policy. This regards to the elements of stabilizing the inflation rate and the output stability through the Keynesian model. Keynesian focuses on the nature of imperfect competition. This combines with the problems associated with a fluctuation in the nominal wage rate that exists in the labor market. The fluctuation in the wage level introduces the policy aimed at ensuring stability of the already inflated prices. Problems associated with this Keynesian model are the presence of a fluctuation of wages and price variations that generate an inefficient allocation of resources and thus the loss in the general welfare. An optimal decision point is thus provided by the policy that maintains a reasonable balance of all concerned variables. Proper analysis of Keynesian model helps to yield some positive feedback. The element of equilibrium is achieved in the operation. This equilibrium is further characterized by the presence of interest rate parity. Another achievement of the Keynesian model is the ability to maintain an optimal position that enables a stable inflation at the domestic level. This goes to the extent of provision of exchange rate changes and thus the element of change is brought about by the relative price of products in the domestic market. Generally, the element of potential policies that seeks to ensure stability to the nominal rate of exchange ends up being suboptimal. The same case applies to the rate peg of an exchange market. This situation shows a condition where the Keynesian policy will be less effective compared to other monetary and fiscal policies (Gali, p11). Fiscal policies on the other hand, provide a solid base that usually tackles all possible issues of recession. Various strategies applied in the fiscal aspect. An expansionary policy is a perfect example whereby a cut in the tax system and reduced spending proofs efficient. This tax cuts combined with an increased government purchase yields positive results. The aim of the expansionary fiscal practice is to enable an increased consumer spending. This spending will further induce potential investors and producers to increase their supply for the already available demand in the market. This brings in about a higher income that will end up raising consumer-spending habit (Seidman, p4). Another notable aspect is the issue of labor markets to control recession. This involves a strategy employed by trade unions and banks based on their market power. The labor markets perform control purpose through the issue of forming collective agreements that advocate for wage settlement. The issue involved in the labor unions is a disciplinary mechanism for workers. This ends up controlling the available opportunities through the creation of employment. Threats associated with the labor union are an inflationary pressure towards the high union power. It is therefore a fundamental aspect to setting a wage limit to ensure proper coordination between the concerned union members (Beetsma, p5). Policies suggested by the classical model would be less effective than the above policies. This is evidenced by the existence of a perfect competition mechanism and the reflection of flexible prices available in the market. In classical economies, the role of money does not attach so much value as a guideline to the control of recession. The only medium used is the classical approach is money as a unit of account. In the case of the monetary approach, the element of money appreciates through the interest rate system and no reference made in regards to the amount of money quantified throughout the circulation (Gali, p15). In the classical philosophical approach, the market is characterized by a perfect competition attribute. This combines with potential to offer flexible price element in all the available market. Monetary approach through the Classical philosophy The perception propounded by the classical economist shows different variables that exhibit an independent level of monetary policy. The presence of nominal variables is the behavior of the price that has an effect in the entire household utility. The element of household utility is a function relating to consumption. The classical approach depicts large fluctuations in the inflationary pressure. Nominal variables will thus follow a rule that does not guarantee the best equilibrium policy for the nominal variable. The assessment and evaluation of the classical philosophy does not give a positive monetary policy. This is so especially in cases of finding out the based policy to combine in finding the real and nominal variable of the monetary theorem. The classical philosophy fails to outline the best scenario in the explanation of real effects of real and nominal variables. The prediction error concerning the price level changes, the money supply and the nominal rate is excessively absurd in forming conclusive evidence in the monetary frameworks. Fiscal approach through classical philosophy The classical approach provides policies through which financial constraint in the economy is much felt in the economy. Fiscal involvement focuses on taxation, government spending and borrowing. This had an influence in the economic pattern and growth of demand and output. Fiscal changes have an effect to the demand and supply functions. Supply side Philosophy A great emphasis on the supply side economics is the idea of the government initiatives to affect taxes and other regulations. The supply side view advocates that growth of the economy is widely felt through investment boost initiatives and an increase in production. This growth will be felt through a policy framework that ensures a reduced marginal tax and market deregulation. A lot of controversy is felt in the dealing associated with the congress debate the issue of supply and demand related elements. This is as far as issues of taxes are concerned. The supply side economics is a determinant in the way through which issues of the price mechanism affects the economy. The supply side theorem effects exert pressure on the marginal tax rate, capital gains and the dividend limits. Taxation effect is felt in the way the government handles it in its operation. The effects of tax are felt on each consumer. This has an overall effect of bringing some gains to all concerned stakeholders. This is mainly a situation where taxes are cut off to reasonable levels. It is reasonable to format the system of tax to a situation whereby the rich rate of tax becomes higher than that of the poor. This helps to ensure an equitable distribution of wealth and resources. Works Cited Atkinson, R.D., Supply-side Follies: Why Conservative Economics Fail, Liberal Economics Falters, and Innovation Economics is the Answer. Washington D.C: Rowman & Littlefield, 2006 Beetsma, R.M.W.J., Monetary Policy, Fiscal Policies, and Labor Markets: Macroeconomic Policymaking in the EMU.: Cambridge University Press, 2004 Gali, J., Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework. Washington D.C: Princeton University, 2008 Mankiw, N.G., Monetary Policy. New York: University of Chicago Press, 1997 Peters, M., What the 2008/2009 World Economic Crisis Means for Global Agricultural Trade. Ottawa: DIANE Publishing, 2010 Smith, L.D., Philosophical Critiques of Policy Analysis: Lindblom, Habermas, and the Great Society. Washington D.C: University Press of Florida Read More