Question

• In this course we learned about a number of real world complications that make monetary and fiscal policy more challenging than simple theory would suggest. Given the state of the economy and the causes of that state—think back to earlier discussions about the current economy—what should be the appropriate mix of fiscal and monetary policy, from a Keynesian perspective? From a neoclassical perspective? Which makes the most sense to you? Provide evidence (include and least one link/citation) to provide support to your conclusion.

Answer 1

Monetary policy is the policy of money supply & credit creation, done by central banks. Fiscal policy is the policy of government expenditure receipts. Both these policies approach are used to correct for macro economic disequilibria - excess & deficient demand. Contractionary policies are used in excess demand, expansionary policies are used in deficient demand.

• Keynesians focus on aggregate demand corrective aspects, their fiscal solutions focus on increasing or decreasing AD. These fiscal solutions require timely estimation of AD disbalance; & initiate policy planning, implementation at accurate time, for desired results timely. This perspective also states that fiscal policies (government spending approach) solve recessionary gaps, but with the issue of private investment crowding out effect. Keynesians also beleive in expansionary monetary (money supply) policy in reducing interest rates & correcting deficient AD.
• Neoclassicals focus on aggregate supply side corrective aspects, believe that economy has automatic stabilisers. They are not too optimist about pre-estimations, take into account possible policy delays, & the time of policy effect. So, they state that fiscal policies (government spending approach) is just a temporary, & not permanent solution. Neo classicals perspective about monetary policies is that 'money is neutral', change in money supply changes only nominal variables, & not real variables.

The appropriate mix of fiscal & monetary policies as per is that : Fiscal policies should be used as a short term corrective measure, when instant economy correction is needed, and when anticipations & policy formulations are maximum. Monetary policy should be used very strategically in steps, for long run goals achievement, of a healthy self growth propelling economy, with less natural rate of unemployment.

References : https://courses.lumenlearning.com/suny-fmcc-macroeconomics/chapter/the-policy-implications-of-the-neoclassical-perspective/