Unit 6 Scenario B-2 - Essay Example

9/5/2007 Jim Voss, Economic Advisor for the Mallon for SenateCampaign Zohra Jabeen Contrasting fiscal and monetary policyIntroduction: A detailed research and analysis has been done and presented in the following matter , this is in reference to our understanding of the Pro’s and Con’s of using a change in the tax rate to achieve the desired increase in output and how this effects the equilibrium prices, output , and unemployment .Also, how a change in the open market operations occurs to achieve the desired increase in output and how it effects the equilibrium prices, output and unemployment .

The relationship between deficits and national debt will follow and how it relates to the health of the economy . This memo will also highlight the differences between monetary and fiscal policies, what are the pros and cons associated with each type of policy? Is either policy more effective in increasing output growth or stabilizing inflation and unemployment? Discussion:With reference to the tax changes, a decrease in the tax rates would help achieve the desired increase in output.i.e lower the tax rates more people will buy meaning the demand will be high and so the output would be high .

this decrease in tax rates would further imply an increase in the equilibrium price, the output and the unemployment rate. Furthermore if we analyze, we can foresee the following Pro’s and Con’s of the situation discussed above; pro’s being the fact that the unemployment rates will decrease the Marginal Propensity to consume (MPC) and the Gross Domestic Product (GDP) will Increase subsequently. One very serious aspect which is a definite Con; the governments Tax Revenue will decrease. The changes in open Market operations to achieve the desired increase in output would imply the following: the central bank will increase their government securities, people will spend more and thus the output will rise.

This flux will then imply the following trend; an increase in the equilibrium price, an increase in the output and a subsequent decrease in the unemployment rate. Elaborating on the relationship between the deficits and national debt, we would like to mention the fact s that need to be considered here .In order to understand how both national debt and deficits go hand in hand; A budget deficit will imply an increase in the size of the national debt, only by the amount of the deficit .Conversely, if there is a budget surplus it will allow the government to pay off the bond holders thus reducing the size of the national debt.

The difference between the monetary and fiscal policy is obvious as by monetary policy is meant all actions that a government takes to control the money supply and the interest rates, and by fiscal policy is meant the change in the level of public spending and also how taxation affects the level of demand. Elaborating on either of them being effective in increasing output .We would shed light on the following facts, if our objective is reduction in unemployment our target would be to increase the aggregate demand and so the government is expected to use the fiscal policy, the instrument herein would be taxation.

On the other hand if we are targeting Price Stabilility, then we will have to have increase in bank lending through decreasing interest rates which would imply the monetary policy. In conclusion we can hence state that the connection between deficits, national debts and all of the above stated issues are: price stability, unemployment control and increase in the output.“ WORKS CITED “( Dan Moynihan, Brian Titley , 2000, 232-300)