The Two Branches of Macro-Economic Theory

The Two Branches of Macro-Economic Theory

Introduction

Fiscal Policy

The government develops and executes the fiscal policy in which it utilizes revenue collection (taxation) and expenditure (spending) to control the economy (Sullivan & Sheffrin, 2003, pp 387). The manipulation of taxation and expenditure enables the government to influence certain variables of the economy. The government can influence aggregate demand and the economic activity. If the taxes are increased then it will drive down the aggregate demand and if the expenditure is increased by the government then it boosts the aggregate demand. Recently due economic recession, the government had to continue with the tax relaxation given to riches to keep the demand up. During the great recession, the United States government made numerous expenditures on construction projects to increase the stalled economic activity and boost demand and employment. Another feature of fiscal policy is to control the distribution of income in the economy. The government analyzes the accumulation of wealth and then takes appropriate measures to divide that wealth among the deficit areas of economy. The resource allocation is also controlled by the fiscal policy by providing tax relief to the resource deficit areas and taxing the scared resources to prevent exhaustion. The fiscal policy is the budget of the government and its enables the government to control the economic activity.

Monetary Policy

The control of supply of money is the primary objective of monetary policy as it aims to keep an optimal interest rate in the country to enable growth while keeping the inflation in control. Monetary policy serves as a tool to promote economic growth and stability. The primary goal of the government is to keep relatively stable prices, to avoid unnecessary inflation and to reduce and maintain low unemployment. The guideline for following a monetary policy at an optimal level, the monetary theories is used. The monetary policy can either by expansionary or contractionary. An expansionary policy increases the money supply in the economy at a faster rate than required thus boosting aggregate demand. Usually the interest rate is lowered, borrowing is carried out or seigniorage is done which can result in inflation. The reduction in interest rate is also done in the face of recession and to boost employment in the economy along with GDP. The contractionary monetary policy advocates reduction in the frequency of money supply as compared to the standard to reduce inflation, restrict the economic activity due to scared resources. The inflation causes the assets value to decrease which can be of great concern to the government and business and the government increases the interest rate to counter the adverse effects.

DiscussionRole of Government according to Keynes'

Keynesian economics theories are of the view that the economy cannot be left in the hands of the private sector as it results in unproductive or in some cases counterproductive outcomes which then puts pressure on the government to take corrective actions. The governments using public sector policies, particularly monetary policy and fiscal policy by central bank ...