Macroeconomics Policy Assignment
Question :
provide a balanced argument for each of the five debates by presenting the pros and
cons for each, and to state and explain your position with respect to the arguments for each debate.
The five debates are,
1. Should monetary and fiscal policymakers try to stabilize the economy?
2. Should monetary policy be made by rule rather than discretion?
3. Should the central bank aim for zero inflation?
4. Should the government balance its budget?
5. Should tax laws encourage saving?
Answer :
1. Importance of monetary and fiscal policy in stabilizing the economy
In the context of the pros, the policy makers should try themselves in stabilizing the economy here the households as well as firms can be pessimistic and this way, they might cut their spending habits. Hence the fall in the aggregate demand will reduce the production of the goods and the services. This way the firms will be layyed off workers and hence the unemployment rate will rise in the economy. This is the reason, the policy makers need to stabilize the economy with both of the monetary and fiscal policies. The creation of the macro-economic theories assisted the policy makers in reducing the severity in the context of economic fluctuations. Hence from the argument, both the monetary and fiscal policy can be bale to stabilize the aggregate demand and this way the production as well as employment can be easily enhanced (cengage, 2020). When the aggregate demand will be inadequate in ensuring higher employment, it will be the responsibility of policymakers in cu the spending by the government.
However, in the context of cons, it have been argued that both of the monetary as well as the fiscal policy cannot work immediately but it can work with a huge lag. With the help of the monetary policy the aggregate demand is getting effected through the change in the rate of interest and this way the spending is getting affected. The fiscal policy is working with a long lag and in this context, the economic forecasting turns out to be in precise by nature. Economic forecasting turns out to be highly in precise by nature and unpredictable and hence at the time of implementing both the monetary and fiscal policy, there need to be good knowledge regarding the future conditions of the economy (issuu, 2012).
From my position, it can be stated that the contribution of the monetary policy towards the economy turns out to be best through the anchoring of inflation expectations at a level which is consistent with the stable process. However, in the context of the fiscal policy, discretionary measures turned out to be not effective enough in addressing the underlying causes.
2. Arguments regarding monetary policy to be made by rule than discretion
Discretion in the context of the monetary policy is that it fails in limiting the in competencies and power abuse. In order to avoid this abuse, the monetary policy need to be made as a rule where the policy could not be inconsistent by nature (cengage, 2020)
However the pitfalls o making monetary policy a rule is that the flexibility issues. In this context, it should be the decision of the FED regarding how to response to the economic shock.
From my point of view, in reality, there arises a compromise in between rules and discretion which is referred as inflation targeting. However, from the overall arguments, it can be stated that the monetary policy is much transparent than the discretion policy (mwnation, 2020).
3. Arguments regarding Central bank aim for zero inflation
The benefit regarding the aim of Central Bank for zero inflation is to be estimated gains the achievement of the costs. The reduction of inflation actually helps in the reduction of the higher unemployment and this way the short trade-off will be getting improved gradually. With this, the policy makers also gets the focal point properly in order to reach the stable prices.
Again the cons involves disinflationary recession through which the permanent scars in the economy can be developed. The living standard might be at stake along with productivity.
As per my opinion, the aim for zero inflation will lead to short-term unemployment and this way the long term benefit will get reduced. This way the unemployed people will be suffered from social as well as income trauma (europa, 2020).
4. Argument regarding balancing of the budget by the government
With the help of budget balancing, the future tax payers will enjoy the lesser government spending and this way the debt as well as the accumulated interest rates can be easily paid off.
In the context of cons, the redistribution of the income turns out to be one of the important problem because of this. This will assert the government in not attaining the risks forever.
As per my view point, the argument depends on the situation. In many situations, deficit is beneficial for the economy in the time of the long run (europa, 2020).
5. Arguments regarding encouragement of saving through tax laws
With the help of tax, the parents can be able to save the money for their children in the future. This will boost the economic growth and it will also acts as lesson for the students to save the money (europa, 2020)
However, the tax charges might reduce the taxation from the capital income and this way the national saving can be enhanced and hence the public saving will be reduced. Therefore, so called saving incentives will make the situations worse (issuu, 2012).
From my view point , the tax system discourages saving as it decreases the benefits of those who have the prior wealth accumulation and this way the economy cannot be benefited well.
References
cengage. (2020). Should Monetary Policy Be Made by Rule or Discretion? . Retrieved from Monetary and Fiscal Policy: https://www.cengage.com/economics/tomlinson/transcripts/8554.pdf
europa. (2020). The role of fiscal and monetary policies in the stabilisation of the economic cycle. Retrieved from Introduction: https://www.ecb.europa.eu/press/key/date/2005/html/sp051114.en.html
issuu. (2012). Mankiw_ Five Debates Over Macroeconomic Policy . Retrieved from Mankiw_ Five Debates Over Macroeconomic Policy : https://issuu.com/clubeconosofia/docs/mankiw_-five-debates-over-macroeconomic-policy
mwnation. (2020). Should the central bank aim for zero inflation? Retrieved from Should the central bank aim for zero inflation?: https://mwnation.com/should-the-central-bank-aim-for-zero-inflation/
