MACROECONOMICS

Macroeconomics

Macroeconomics

Section A

a.

Monetary Policy and Fiscal policy are not the only tools that government could use to manage and develop economy. The government also has to focus on infrastructural issues of the economy, as it is also responsible for initiating development programs and growth in the economy. It may not be merely achieved through monitoring Monetary and Fiscal Policy. However, Monetary and Fiscal policy are key policy measures that help government achieving the development goals. They act as a tool for government to achieve various tasks.

Government with the help of Central Bank develops and monitor Monetary Policy of the economy. It includes all economic measures taken by a central bank to achieve their goals. In a narrower sense, it is a shortage of money a contractive / restrictive monetary policy, an expansion of money supply/expansionary monetary policy. The objective of Monetary Policy is to achieve Price Stability and Economic Growth. However, in some cases Central Banks of the countries have failed to achieve the objective of Monetary Policy and has not been able to control inflation in the economy.

The primary mission of central banks is monetary policy to promote price stability that is to control inflation, which is a basic condition for sustainable economic growth in the long term. Furthermore, monetary policy also seeks to smooth out business cycles. In theory, the transmission mechanism of monetary policy to economic activity is mainly through the impact of interest rates on credit availability and liquidity.

A decrease in the benchmark interest rate results in a lower cost of money. This can encourage consumption and investment through credit expansion, as long as traders have greater debt capacity. On the other hand, when the country wants to control inflation, it could increase interest rates to increase the cost of borrowing and reduce credit expansion, which will result in a decline in inflation.

On the hand, fiscal policy is totally under the control of government as it is related to government revenues and expenses. The government can directly change the fiscal policy tools in order to achieve its objectives. The government uses taxes and subsidies to control fiscal issues of the economy.

It is important to note that continued use of Keynesian fiscal prescriptions led to the passage of time the weight gain of the state in Western economies with loss of relative positions for private enterprise. In addition, fiscal policy was defenseless against the peculiarities of the crisis of the seventies, with the coexistence of unemployment and inflation. Keynes believed that the instability of aggregate demand was the source of problems of different types and fiscal policy conceived as the universal instrument capable of resolving all issues. Inflation would thus be the result of excess demand that could be solved by subtracting taxes from income families. But the main concern in the thirties was not inflation but deflation and unemployment. It was here that Keynes put the emphasis, recommending increased public spending, even that unnecessary work. Hence, for government it is important to control ...