Question

a. what allows the Fed to be independent g. what are the problems of using fiscal policy and what are the problems of using monetary policy h. why a balanced budget can be destabilizing.

b. what are the characteristics of a good commodity money and why?

c what gives fiat money its value and what are the advantages and disadvantages of fiat money

Answer 1

Question A

The Federal reserve system has to be independent to avoid manipulation from short term political parties and should have right of self-government. It is resposible of being transparent and accountable in its supervision of banks and operations of the payment system.

Problems with Fiscal Policy:

Future Prediction - Without accurate predictions and poor infromation it will affect the fiscal policy, if govenment believes thats market is going through recession they will increase the agrregate demand but they are wrong and economy is growing too fast it will result to inflation

Affects public services - If Government reduces public spending do decrease the inflation it can directly affect to the failure of public services.

Taking longer time - Changing of policies can take longer time to filter the economy and by that time it can be too late

Problems with monetary Policy:

Taking longer time - Changing of policies can take longer time to filter the economy and by that time it can be too late, even the effects on an economy may take months or even years to materialize.

Liquidity Trap - Sometimes keeping interest rates very low can lead to a liquidity trap where the customers prefer to  keep their funds in cash savings and avoid bonds.

Monetary Tools- They are used in general and can not solve the problem of specific industry or region.

Balanced budget is not good for developing or underdeveloped countries as it cannot cure inflation or deflation and government intervention can not be removed for. During War or emrgency balanced we have to increase the expenditure which can cause in deficit budget

Question C

The value of Fiat money is not backed by any physical commodity but the stability of government, the value is derived by the demand and supply in market and stability of the issuing government.

Advantages- Till date Fiat money is most stable form of currency for storing the value and faciliting exchange. This help the government to regulate the economy and make policy and decisions

Disadvantages- Fiat money is not backed by any physical commodity like gold and silver is also a drawback, if the government or economy of the country collapses then the value of the money will go down drastically which will create a bubble like zimbabwe