Rethinking Macroeconomic Policy - Assignment Example

INTRODUCTION TO MICROECONOMICS of Question According to Blanchard, Dell’ariccia and Mauro (2010, p. 200), there are four major objectives within the microeconomics of each economy or country. These are objectives in inflation or price stability, low unemployment or full employment, balance of payments and economic growth (Zhou, 2011, p. 229). Governments design and implement macroeconomic policies with a view of meeting the aforementioned objectives. OECD Economic Surveys (2011, p. 39) explains that the macroeconomic policy for economic growth is designed to promote and facilitate production; improve income and living standards and general economic development. Because unemployment has become a major social problem in many economies, the alleviation of unemployment and moving towards full employment has been included as one of the major objectives of macroeconomic policy. Economies have also endeavored within their macroeconomic policy to keep inflation as low as possible and hence make prices stable (Silvia and Iqbal, 2011, p. 27). Finally, the balance of payments is pursued by countries through their macroeconomic policies. Middleton (2011, p. xi) explains that governments avoid a situation of large balance of payments because this leads to the depreciation of the local currency against the international currencies such as the dollar. This section gives a critical discussion of the four main objectives of the macroeconomic policy in addition to the description of ways with which governments would be able to meet these objectives. Inflation Zhou (2011, p. 230) argues that the major reason why inflation must be controlled is the fact that an economy ceases to grow when inflation rolls out of control. Poterba and Rotemberg (2008, p. 6) add that the rise of inflation forces governments to increase interest rates through their monetary policy committees. There are two major implications of this situation. Firstly, companies, organizations and businesses stop borrowing hence they do not invest in the economy. Secondly, consumers also fail to borrow, which reduces expenditure and exchange of momentary value (Blanchard, Dell’ariccia and Mauro, 2010, p. 209). However, Davig and Leeper (2011, p. 233) argue that the most significant implication of uncontrolled inflation is the slumping of sectors of the economy, such as housing. OECD Economic Surveys (2011, p. 42) demonstrates that inflation is among the objectives of macroeconomic policy because if there is no price stability within an economy, recession becomes eminent, which emanates from lack of competitiveness among firms within different sectors of the economy. Nonetheless, the views of economists on the inflation reveal that it is only negative for debtors. Poterba and Rotemberg (2008, p. 15) demonstrate the re-distribution phenomenon which results from inflammation. High inflation periods are characterized by the re-distribution effect which moves in the direction of borrowers from savers. Because the monetary value is eroded by inflation, the savings of savers drops in value. This is therefore a positive thing for the borrower (Blanchard, Dell’ariccia and Mauro, 2010, p. 215). The housing market is one of the most significant illustrations of cases where inflation benefits borrowers. According to Zhou (2011, p. 232), re-distribution impacts negatively on the economy over a long time because it penalizes on thrift. This is due to the fact that the ability of people to invest within the economy correlates with saving. Because of the negative impacts of inflation, governments have designed monetary policies, such as through central banks. It is through the monetary policies that governments are able to regulate prices and hence endeavor to achieve stability (Parguez and Bliek, 2007, p. 24). These policies allow governments to fix interest rates, control wages and prices and give allowances to cater for cost of living as the major ways of curbing inflation (Middleton, 2011, p. iv). Unemployment According to OECD Economic Surveys (2011, p. 41), the issue of unemployment became significant when census data in different countries demonstrated that millions were unemployed. It is because of this full employment has been included by governments as one of the objectives of macroeconomic policy. Parguez and Bliek (2007, p. 29) explain that unemployment is costly to the government because of the benefits given to the unemployed. On the other hand, Silvia and Iqbal (2011, p. 28) argue that the major costs that the government incurs from unemployment are the loss of tax revenues. It is because of this reason that governments have endeavored to promote employment through development of infrastructure, funding investments, supporting training initiatives and education and developing farmlands (Gulzar and Shafi, 2011, p. 558). Nonetheless, some measures of promoting employment by governments, such as alleviation of benefits of the unemployed, have been criticized for causing poor living standards (Blanchard, Dell’ariccia and Mauro, 2010, p. 214). Economic Growth Zhou (2011, p. 229) argues that economic growth is the most significant of the objectives of macroeconomic policy. This is due to the improvement of living standards which results from economic growth. However, there are tradeoffs of equity and efficiency in economic growth (Parguez and Bliek, 2007, p. 32). For example, developed economics have registered worse inequalities in the distribution of income within its population. Effective growth in the economy is described as that which leads to improvement of the living standards even among the poorest households (Poterba and Rotemberg, 2008, p. 14). More importantly, the growth of the economy must be sustainable (Gulzar and Shafi, 2011, p. 554). In order to promote economic growth, governments have encouraged investments in the economy, both local and foreign (OECD Economic Surveys, 2011, p. 44). Moreover, governments create policies that are favorable for investors as a way of promoting economic growth. Development of infrastructure is however, said to be the most effective way through which governments promote economic growth (Gulzar and Shafi, 2011, p. 556). In addition, development and promotion of research and development and education are used by governments as a measure of promoting the growth of the economy. Provision of capital for small businesses is another significant way of encouraging economic growth (Poterba and Rotemberg, 2008, p. 13). Balance of Payments Regardless of balance of payments being one of the major objectives of macroeconomic policy, it is argued to be less significant within the modern economy (Silvia and Iqbal, 2011, p. 27). This is due to the maturity and liberalization of capital markets which characterize developed economies. Gulzar and Shafi (2011, p. 553) further demonstrate that developed nations are able to fund deficits in their current accounts through attraction of large amounts of foreign investments. Balance of payments is, however, a big problem for developing economies (OECD Economic Surveys, 2011, p. 39). This is attributed to the fact that the developing economies have accumulated large account deficits over a period of time. This has resulted to the increased lending from the IMF by governments in developing economies (Blanchard, Dell’ariccia and Mauro, 2010, p. 201). Question 2 John Maynard Keynes (1883-1946) made major contributions to macroeconomics. According to Dimand (2007, p. 247), the ideas on macroeconomists that were put forth by Keynes have played a significant role in the contemporary theory on microeconomics and practical application of these ideas. Keynes and his proponents show support for the Keynesian economics (Middleton, 2011, p. xi). According to Keynes, the sum total of spending or demand within an economy does not necessarily equate the sum total of production ability of total supply of that economy (Kirshner, 2009, p. 527). Therefore, the postulates of Keynes on macroeconomics acts too argue that various factors which determine inflation, production and employment affect demand and supply (Goldstein, 2008, p. 300). The contributions that Keynes made within macroeconomics include his authorship and publications that have been used by economists within the modern economies to understand the forces within the economy and hence predict their consequences (Francis, 2011, p. 269). More specifically, Keynes’ postulates on wages and bargaining have been applied widely in understanding labor markets (Toye, 2009, p. 983). Keynes further provided elaborate critique of various classical postulates on investments and savings. This is through his demonstration that savings, expenditure and investment play the leading role in determining interest (Kriesler and Nevile, 2001, p. 103). Keynes’ model on economics has also found wide application in practice, especially in understanding and determining the forces of demand and supply (Goldstein, 2008, p. 302). According to Middleton (2011, p. xx), Keynes’ model has been used in the labor sector to understand the equilibrium that is achieved in relation to the level of employment. In addition, Keynes contributed into the factors which affect savings and consumption. Dimand (2007, p. 248) explains that Keynesian model of microeconomics demonstrates savings and consumption as being determined by real income. In addition, interest rates and money are calculated with due consideration of the ideas that were put forth by Keynes. Regardless of these contributions, Keynes’ model has received much criticism from the opponents of his model. The monetary school of thought views the economy in general as composed of a demand and supply equilibrium (Kirshner, 2009, p. 536). This demonstrates a criticism and opposition to the Keynes’ analysis of the forces of supply and demand. Moreover, Keynes’ analysis of inflation as an aggregate of demand has been criticized by economists who endeavor to demonstrate that the supply of money plays the most significant role in inflation (Olesen, 2011, p. 55). In addition, Keynes’ analysis of macroeconomic forces and the presentation of ideas in economics have been criticized as being collectivist (Goldstein, 2008, p. 305). The classical microeconomic views have also criticized Keynes’ macroeconomic analyses as fallacious. This is due to the demonstration of factors in microeconomics as the contributing forces to inflation or recession (Dimand (2007, p. 264). References Blanchard, O, Dell’ariccia, G, and Mauro, P 2010, Rethinking Macroeconomic Policy, Journal of Money, Credit and Banking (Wiley-Blackwell), 42, pp. 199-215 Davig, T, and Leeper, E 2011, Temporarily Unstable Government Debt and Inflation, IMF Economic Review, 59, 2, pp. 233-270 Dimand, RW 2007, Irving Fisher, J. M. Keynes, and the Transition to Modern Macroeconomics, History of Political Economy, 27, 4, pp. 247-266 Francis, T 2011, Review Essays: Keynes and Macroeconomics after 70 Years, Philosophy of the Social Sciences, 41, 2, pp. 269-277 Goldstein, JP 2008, Heterodox Macroeconomics: Crottys Integration of Keynes and Marx, Review Of Radical Political Economics, 40, 3, pp. 300-307 Gulzar, S, and Shafi, K 2011, Balance of Payments, Exchange Rate Regime and Monetary Policy, Interdisciplinary Journal of Contemporary Research In Business, 3, 1, pp. 558-563 Kirshner, J 2009, Keynes, legacies, and inquiry, Theory and Society, 38, 5, pp. 527-541 Kriesler, P., and Nevile, J 2001, Chapter 11: Is-Lm and Macroeconomics after Keynes. In, Money, Macroeconomics and Keynes, pp. 103-114 Middleton, R 2011, Macroeconomic policy in Britain between the wars1, Economic History Review, 64, 3, pp. i-xxxi OECD Economic Surveys, 2011, Refining macroeconomic policies to sustain growth 2011, OECD Economic Surveys: Brazil, 16, pp. 39-68 Olesen, F 2011, Davidson on Keynes and Macroeconomics, International Journal of Business and Social Science, 2, 8, pp. 50-59 Parguez, A, and Bliek, J 2007, Full Employment: Can It Be a Key Policy Objective for Europe?, International Journal of Political Economy, 36, 3, pp. 24-46 Poterba, J, and Rotemberg, J 2008, Inflation and Taxation with Optimizing Governments, Journal of Money, Credit and Banking (Ohio State University Press), 22, 1, pp. 1-18 Silvia, J, and Iqbal, A 2011, Monetary Policy, Fiscal Policy, and Confidence, International Journal of Economics and Finance, 3, 4, pp. 22-35 Toye, J 2009, Keynes and development economics: a sixty-year perspective, Journal of International Development, 18, 7, pp. 983-995 Zhou, H 2011, Economic Systems and Economic Growth, Atlantic Economic Journal, 39, 3, pp. 217-229 Read More