Macroeconomics

ABSTRACT

The paper will discuss the main concepts of economics in accordance to a couple of situations. With this, the readers will be aware of the main concepts i.e. fiscal and monetary policy. These are the two important tools that are used and managed by the governmental sources in order to get hold of the situation and to ensure that the economy is not being impacted in a anegative manner. The paper will then discuss as to how the fiscal and monetary policies were used in reducing the impact of the financial crisis that occurred in 2008.

Table of Contents

Introduction4

Discussion4

Part 14

Situation Analysis4

Role of Fiscal and Monetary Policy in Reforming the Situation5

Fiscal Policy5

Monetary Policy6

Corrective Actions6

President6

Chairman of Fed7

Appropriate Strategy8

Effects of the Strategy implementation9

Opportunity Cost9

Part 210

Situational Analysis10

Consequences on GDP10

Effective Strategy11

Conclusion11

Monetary Policy Responses12

Monetary Policy Causing Crisis12

Effects of the Monetary Policies Implemented In Reaction to the Crisis13

Impact of Solutions in the Short and Long Run14

Fiscal Policy Reponses15

Fiscal Policy Causing Crisis15

Effects of the Fiscal Policies Implemented In Reaction to the Crisis16

Impact of Solutions in the Short and Long Run17

References19

Macroeconomics

Introduction

Macroeconomics is a branch of economics that deals with the behavior of individual, households, and firms in the formation of the decision based on the allocation of the limited resources. From the perspective of the government, there are two important goals of the macroeconomics policy formation:

To keep inflation low.

Improve GDP by the rate of 3% per annum.

Budget and debt are some of the two factors which affect the GDP and the development of economy. Therefore, government needs to be very efficient in sustaining the ratio and promoting the growth. Appropriate strategy and a mix of plans and decision are needed to achieve this objective. In this essay, strategy and roles of different authorities will be highlighted essential for the maintaining the GDP and economy (www.investopedia.com, 2013).

Discussion

Part 1

Situation Analysis

In this situation, it is assumed that the country is facing high unemployment and the interest rates are near to zero. Inflation rate of the country has increased by 2% per year and the GDP growth has declined to even less than 2% per year.

In this instance, Okun's law is observed which states the statistical relationship between a country's unemployment rate and growth rate. It is clear from the Okun's law that the unemployment rate and inflation rate are in direct proportion to each other. Thus, the greater the unemployment the more will be the inflation. Consequently, gross domestic product (GDP) will be affected negatively resulting in the hazardous signals in the economy (www.investopedia.com, 2013).

Figure 1: Source: Economic Journal

The situation is worse and against the goals of the government macroeconomics policy formation. Thus, the government has to look upon the factors which are driving these instances and constitute effective strategies to overcome these problems (Kashyap & Stein, 1994).

Role of Fiscal and Monetary Policy in Reforming the Situation

Fiscal Policy

Fiscal policy is the effective use of government revenue collection and expenditure to influence the economy. Government should constitute the policy and strategy which ensures the effective allocation of the government revenues ...