Project #38851 - macro 9discussion

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1 post & 2 responses

Respond to two of the following Discussion topics.

Topic 1: Monetary and fiscal policy instruments are used to affect the 
aggregate demand (AD) in the economy. What is the difference between 
contractionary and expansionary monetary policy? What is the difference 
between contractionary and expansionary fiscal policy? How does each 
policy affect the AD in the economy?

Topic 2: There are differences in the ways monetary and fiscal policy 
instruments are formulated and implemented. How does fiscal policy 
differ from the monetary policy in the U.S. economic system? What are 
the major problems of the fiscal policy?

Topic 3: Studies indicate that there is a short-run tradeoff between 
inflation rate and unemployment rate. If you were macroeconomic policy 
maker, how do you balance the short-run tradeoff between inflation rate 
and unemployment rate?


Respond to-
Topic 1: Monetary and fiscal policy instruments are used to affect the 
aggregate demand (AD) in the economy. What is the difference between 
contractionary and expansionary monetary policy? What is the difference 
between contractionary and expansionary fiscal policy? How does each 
policy affect the AD in the economy?
    An expansionary monetary policy increases the money supply while a 
contractionary decreases the money supply in the economy. Expansionary 
monetary policy is usually put into effect after a recession has already 
begun, and the goal is to bring the economy back up, by increasing 
demand.  The first effect during the expansionary policy here is the 
Federal funds rate is lowered which allows the banks to A. keep their 
reserves maintained more easily and B. lend out more money. If this was 
not enough, then the Open Market comes in, and that is when the Federal 
Reserve buys bonds or Treasury notes in an attempt to put more money 
into the bank and allowing more lending. Another process that the Fed 
can use is lowering the discount rate, which is the rate at which banks 
borrow when they borrow from the Fed. This is usually a last resort. In 
contractionary monetary policy, the Fed will do the opposite of 
monetary, and when there has been too much stimulation is when this 
policy comes into play.  Contractionary monetary policy is used to stop 
inflation and bring prices back down. In this policy, doing the reverse 
of expansionary monetary policy, the Fed will raise the discount rate, 
making it more expensive for banks to borrow from the Fed. Also seen in 
this policy is a raise in interest rates and the selling back of Fed 
bonds.

Expansionary and Contractionary fiscal policies are different in that 
contractionary is used to restrict or decrease spending and expansionary 
is used to increase spending.
“A form of fiscal policy in which a decrease in government purchases, an 
increase in taxes, and/or a decrease in transfer payments are used to 
correct the inflationary problems of a business-cycle expansion. The 
goal of contractionary fiscal policy is to close an inflationary gap, 
restrain the economy, and decrease the inflation rate. Contractionary 
fiscal policy is often supported by contractionary monetary policy. An 
alternative is expansionary fiscal policy.” (amosweb.com, 2014) 
Expansionary fiscal policy is like with the monetary policies, its 
opposite. In expansionary policy, government purchases are increased, or 
at least that is the goal. With the increase of purchases taxes are 
lowered.

The effects on AD are seen as initially positive in both types of 
expansionary policies. In expansionary fiscal policy, aggregate demand 
is increased, as well as AS. Here, the unemployment issue is turned 
around with the increase of production which is an increase in AS that 
takes place because of  an increased AD, and more jobs are created.  A 
contractionary fiscal policy though will, in the process of closing the 
inflationary gap, force the AD curve to shift to the left. 
Contractionary monetary policy decreases AS when it raises interest 
rates, making it harder for businesses to get credit or invest. A 
decline in AS, is caused after the cost of production has increased, and 
then there is also a decline in AD. In expansionary monetary policy, AD 
is increased which is shown as a shift to the right on a graph, due to 
the higher money flow into the economy. The lower interest rates allow 
prices to drop enough for the economy to pick up.

Topic 2: There are differences in the ways monetary and fiscal policy 
instruments are formulated and implemented. How does fiscal policy 
differ from the monetary policy in the U.S. economic system? What are 
the major problems of the fiscal policy?

The actions used by the central bank to accomplish macroeconomic 
policies such as full employment, reliable economic growth, and 
stability in prices are referred to as monetary policy.  Fiscal policy 
is the spending that is done by the federal government. Fiscal policy is 
not determined by the Federal Reserve, as they have no hand in this 
policy. Congress and the Administration determine the decisions that are 
made regarding the tax and spending. The problems are numerous. If 
government spending is increased, then AD is affected and likely will 
not increase due to the fact that with an increase in government 
spending comes borrowing money or raise taxes.  When the government 
borrows more, this hurts the interest rates. We’ve already learned that 
when this occurs, prices for consumers will rise and aggregate demand 
decreases. Another problem can be that since fiscal policy relies on 
other aspects of aggregate demand, if Congress were to reduce taxes, it 
would not necessarily boost spending if there is a low amount of 
confidence among consumers. Other issues include the fact that 
implementing new spending plans take too long to affect the economy, 
poor information can lead to an ineffective fiscal policy and cause 
inflation, increasing taxes in an attempt to lower aggregate demand can 
in some cases cause workers to not want to work, and an expansionary 
fiscal policy could lead to an increase in deficit. Worst case scenario, 
there could be a market failure if public services such as education and 
public transportation services are negatively affected.

References:





Respond to--pic 1:
Expansionary monetary policy is when an increase in the money supply and 
a reduction in interest rates are used to correct the problems of a 
business-cycle contraction; whereas monetary policy is a decrease in the 
money supply and an increase in interest rates are used to correct the 
inflationary problems of a business-cycle expansion (AmosWeb, 2014). 
Contractionary fiscal policy is when revenues is higher than spending 
(the government budget is in surplus) and expansionary is when spending 
is higher than revenues (budget is in deficit) (Weil, 2002). For 
expansionary fiscal policy, an increase in transfer payments raises 
aggregate demand indirectly by increasing disposable income, which leads 
to higher consumption-and that leads to higher aggregate demand; whereas 
contractionary affect on AD is that if when a government was in 
recession and if it is slowing growing again, prices will increase as 
well. Therefore, they will raise taxes and will decrease government 
spending and a decrease in transfer payments, therefore cause a shift in 
AD(Education Portal, 2003).



Topic 2:
" Monetary policy is a term used to refer to the actions of central 
banks to achieve macroeconomic policy objectives such as price 
stability, full employment, and stable economic growth. In the United 
States, the Congress established maximum employment and price stability 
as the macroeconomic objectives for the Federal Reserve. As a result, 
the Federal reserve is an independent agency of the federal goverment. 
Fiscal Policy is a broad term used to refer to the tax and spending 
policies of the federal government. Fiscal policy decisions are 
determined by the Congress and the Administration; the Federal Reserve 
plays no role in determining fiscal policy (Federalreserve, 2014). A 
major problem of fiscal policy is crowding out, which is a reduction in 
aggregate demand that results when a fiscal expansion raises the 
interest rates. That is when the goverment increases spending, the 
interst rate rises and investment falls. Another one is the multiplier 
effect, where a rise in the interest rate has a stong affect on 
investments. This is because the interest rate is the opportunity cost 
of holding money, and as this increases, taking out loans becomes 
relatively less attractive.

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Due By (Pacific Time) 08/31/2014 08:00 pm
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