Question

In a perfect world, we want our economy to grow consistently at a decent rate over time. Time and time again, however, we’ve experienced painful economic decline and recessions. With all the knowledge and technology we have today, can’t we do a better job at protecting our economy? Now, think of numerous fiscal/monetary policies that the US government/the Fed have made. Share your opinion about how good, bad, effective or ineffective do you think those policies were. Why or what factors do you think help explain the differences in the effectiveness of those policies. Do you think the US government/the Fed will do better if we have a system that holds accountable those in charge of making policies? Or do you think the existing macroeconomics theory is not comprehensive enough in guiding policy makers making sound fiscal/monetary policies? Or do you think it is the policy makers’ lacking reliance on the macroeconomics theory that makes some of their policies ineffective?

Answer 1

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Question:

Answer:

Monetary Policy:

It is a policy adopted by the central bank globally to manage the money supply in the economy. It is use to control inflation and boost the GDP growth and employment. When a central bank increase the money supply then its decreased the interest rate and money become more cheaper. Increasing money supply increase the demand of money that increase consumption and investment that increased the aggregate demand in the economy. Increased aggregate gate demand increase GDP and price level that increase employment and income level. Central bank uses many tools to increase money supply that are reducing discount rate, purchasing government securities, reducing reserve requirement etc. A central bank follow a expansionary monetary policy to boost the economy.

Limitation of the Monetary Policy:

There are some limitations of monetary policy and its success depends upon the many factors. The limitation of monetary policy are following as:

1. It affect the money supply and interest rate not affect the consumers behaviors, spending habits, confidence level.

2. It is a common policy for the whole economy but the need/demand and situations are different for every industry or economic segments. So, a common treatment will get success has a lower chances.

3. Monetary policy takes time to affecting or changing the situations and economy is very dynamic in nature.

4. In long run a monetary policy do not affect the GDP growth its only increased inflation.

5. The world has became globalized and external economic or other factors also affect the economy so, its creat a difficulty for monetary policy in a unfavorable global situation.

Fiscal Policy:

It is a policy adopted by the government to manage the government's expenditure and revenue. A government follow the expansionary fiscal policy to boost the economy. Through a expansionary fiscal policy a government increase the government increase the spending and cut tax rate. Reducing tax rate and increasing increase the income level increased consumption and investment that increased the aggregate demand in the economy. Increased aggregate gate demand increase GDP and price level taht increase employment and income level.

Limitation of the Fiscal Policy:

1. Most of the time is derived by the government's personal political interest and ignore national interest.

2.The world has became globalized and external economic or other factors also affect the economy so, its creat a difficulty for monetary policy in a unfavorable global situation.

3. The success of fiscal policy depend upon the public distribution system. If system is strong then its get more success otherwise not.

4. Some time tax benefits does not reach to have the right place and other sectors or industry or economic segment take the advantage of it which have no need of it.

Fiscal/monetary policies that the US government/the Fed have made:

Every government follow the same tool according to the requirement of the economy in current situation. If we see the history then found Fed has mostly use of rate cut and purchasing of government securities (quantitative easing) during the economic stress and recession. Also provided bailout packages to the company during financial stress. Other side, US government mostly use stimulus package like Corona Virus stimulus package, tax relief, other social benefits etc. If we talk about the economic statistics of last five year (from 20015-2019) then we found that higher unemployment, unstable inflation, increasing fiscal deficit and public debt are the biggest challenge for US policy makers. The Central bank and government have tried hard but there are number of international issues that created problems in front of the US policy makers. Fed had cut rate at zero level and and government has spent trillion of USD but still situation is not fully control.

The current global pandemic situation is another a big-big challenge for global economy and the USA. USA is the most effective nation and millions of people have gotten Corona positive and thousands have lost their lives. Current unemployment in the USA is more than 14%, inflation is very-very low GDP is following sharply. The Government and central bank giving their best but pandemic is more panic and at wide level. Government has announced Corona stimulous package and other social securities schemes and given tax relief but situation is getting more tough and economy is getting falling down. But still it is a good steps taken py the policy makers and will beneficial in comming time or in long run

We have seen the limitation of monetary and fiscal policy of a country so, you can understand why all these efforts (through monetary and fiscal policy) are not getting more success and situation is not under control and economic growth is falling down.

I think the US government/the Fed will do better if we have a system that holds accountable those in charge of making policies but we has seen above in sections of limitations of monetary and fiscal policy so, it can improve the expect result but a great success is still not granted because of the limitation of fiscal and monetary policy.

I do not like as that the existing macroeconomics theory is not comprehensive enough in guiding policy makers making sound fiscal/monetary policies or the policy makers’ lacking reliance on the macroeconomics theory that makes some of their policies ineffective.

Thank You