Monetary and Fiscal Policy - Essay Example

? Monetary and Fiscal Policy a. What Fiscal Policy Tools could be used to stimulate the Economy? If the real Gross Domestic Product (GDP) is lowerthan the potential GDP, then certain fiscal policy associated tools could be used for stimulating the economy. 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. Increase in Government Spending-This policy helps in providing a lot of relief to the whole of the economy as this aspect helps in lowering the prices of the products or services resulting in stimulating the economy by a greater degree. It also ensures all round availability of goods to the consumers (Labonte & Nagel, 2007). 1. b.  What Monetary Policy Tools Can the Federal Reserve Use to Stimulate the Economy and Increase Economic growth. Please Identify At Least Two Specific Tools If the real GDP Gross Domestic Product is lower than the potential GDP, then there lay certain monetary policy tools that the Federal Reserve can use to stimulate the economy as well as to raise economic growth. These tools are discussed hereunder. Operations in the Open-Market-The Federal Reserve can effectively utilize this tool as it will improve the overall banking system in the United States (US). It will also help the Federal Reserve to maintain high level of reserves that will ultimately deliver significant benefits to the economy of the nation at large. Setting of Discount Rates-This particular monetary policy tool can help in facilitating effective stimulation of the economy along with raising financial growth by a certain degree. In this regard, discount rates are basically the interest rates that are charged while acquiring short-term loans from different financial institutions (Labonte & Nagel, 2007). 2. What Should The Fed Do If It Wanted To Reduce Inflation In Terms Of The Money Supply? There are many effective ways that can be adopted by the Federal Reserve, if it wants to lessen the inflation rate in terms of money supply. The ways or the measures have been discussed in the following section. Liberalization of tariffs-This aspect can prove to be quiet effective as it tends to deliver effective as well as full flow of different economic activities in the nation. It also helps in conducting free trade and activities related to investment that directly benefits a nation’s profitability by a greater degree. Liberalization of imports-If the Fed desires to lessen inflation in terms of money supply, then the main focus is needed to be laid in the aspect of liberation of imports. This can be justified with reference to the fact that lowered rate of imports will tend to increase the level of conducting various economic activities but it would cut down the effects of inflation in a simultaneous manner. Reduction in Exports-If the level of exports is reduced, then inflation can be controlled by a certain degree. This is owing to the reason that this particular aspect will help in cutting down numerous costs that are associated with the exporting of finished products as well as raw materials to other nations. Formation of new and improved economic policies-The Fed can also adopt as well as implement this particular measure in curbing the unfavorable impacts of inflation and also helping an economy in mitigating the problems associated with high rate of economic fluctuations. In this similar concern, the new as well as the improved economic policies might include controlling wage rates and formulating effective tax reforms among others (Labonte & Nagel, 2007). 3. Both Monetary Policy And Fiscal Policy Encounter The Problems Of Lags. Discuss the Kinds of Lags They Encounter and the Degree of Difficulties They Present To Policymakers It is worth mentioning that monetary and fiscal policies help in developing an economy of a particular nation by a significant level. But, on the other hand, it can often be viewed that these policies also encounter certain problems of lags. The lags may appear in different forms and generate problems in various ways. Generally, these lags appear in the form of governmental interventions that seem to create crucial problems. It has been viewed that it is the governments who plays a decisive part in making any sort of change particularly in the monetary and the fiscal policies. The regulator of credit i.e. the Fed also plays an active role in changing these policies by a certain degree. These bodies often create considerable amount of lags because in order to change monetary and fiscal policies, several broad factors are duly considered. These factors encompass fluctuations in the conduct of economic activities and lowered rate of activities related to imports along with exports. Also, one of the major lags that seem to impose unfavorable impact upon the economy is the decrease in the activities related to Foreign Direct Investments (FDI’s) (Labonte & Nagel, 2007). Taking into concern the aforesaid important aspects, it can be affirmed that the kinds of lags that monetary as well as fiscal policy encounter presents greater degree of difficulties especially to the policy makers. Specially mentioning, making changes in these policies generates numerous issues to the policy makers as these govern the financial conditions of a particular nation. Also there are various sorts of risks that can be viewed to be associated with monetary and fiscal policies that eventually present broad difficulties to the policy makers. These risks are: Fluctuations in the economic performance of a country High debt ratio Lowered rate of financial development Improper money supply (Labonte & Nagel, 2007). 4. Discuss And Explain The Concepts Of The Federal Deficit And The National Debt. How Statistically Significant Are They for the United States as Compared To Other Countries? Explain How the Deficits and the Debt Arise In general, the conception of federal deficit can be understood as the amount by which the expenditures made by the federal government surpass its tax revenues. This term can be related with the notion of Federal Debt. Moreover, this particular term can also be understood as the excess spending of the federal government. On the other hand, the perception of National Debt represents the amount of debt that the government of a particular country has borrowed from any external source and entity. In the context of America, the aforesaid concepts i.e. federal deficit and national debt are considered to be quite significant statistically. As America is regarded as a strong nation in terms of having dynamic economic background, the country does not have to borrow debts from other countries in order to support in conducting various economic activities effectively (Hein & Truger, 2007). The monetary as well as the fiscal policies of the US are duly considered to be quiet strong as compared to other countries due to the availability of huge figure of funds in the nation. Furthermore, it can be viewed that there are large percentages of debt that are held by foreign officials in the US context (Hein & Truger, 2007). This can be better understood with the help of the following pictorial illustration. Source: (Labonte & Nagel, 2013). Deficits along with debts generally arise at the time when the financial position of a country generally becomes weak. However, there also exist certain other major causes for the rising deficits and debt. In this regard, the causes are ineffective macroeconomic spending, inappropriate inflow of goods or services, saving-investment imbalance, broader fluctuations in global capital flows and variations in the exchange rates among others. In addition, it can be affirmed that when a particular country borrows funds from another country, then the amount of debts generally gets increased automatically by a considerable level (Labonte & Nagel, 2013). References Hein, E., & Truger, A. (2007). Money, distribution and economic policy: Alternatives to orthodox macroeconomics. United States: Edward Elgar Publishing. Labonte, M., & Nagel, J. C. (2013). Foreign holdings of federal debt. Congressional Research Service, pp. 1-7. Read More