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Macroeconomic Issues

Posted on Aug 2017

Active Monetary and Fiscal Policy

            Active fiscal policy is usually one where the spending and tax levels in an economy are determined without taking into account intertemporal budget considerations (Davig and Leeper, 2011). On the other hand, active monetary policy involves pursuing inflation target without using fiscal policies. There are various arguments provided in support and against active monetary and fiscal policy. One of the arguments in support of active fiscal and monetary policy is that economy usually fluctuates when it is left on its own. In a scenario where households and firms become pessimistic about an economy, they tend to reduce spending leading to a decline in aggregate demand. The decline in AD leads to a reduction in production of services and goods in an economy. Consequently, the levels of outputs end up declining, and unemployment increases making an economy to end up entering into a recession.  Therefore, for purposes of stabilizing AD in an economy a government has to make use of active monetary and fiscal policy.

            The second argument in support of active stabilization policies is related to the fact that unexpected contractions and expansions in an economy leads to imposition of costs on firms and people, which comes in the form of inflation, uncertainty and unemployment. Thus, in this kind of a situation the active economic stabilization policies can be used for purposes of helping to deal with unexpected economic expansions as well as contractions. This is the case due to the fact that leaving the economy alone as a policy maker, result in it taking a lot of time before it can make adjustments on it won. Due to economic problems created by expansion and contractions of an economy waiting for the long-term self-adjustment is too long, calling for the government to make use of active monetary as well as fiscal policy (Davig and Leeper, 2011).

One of the arguments provided against use active monetary and fiscal policy is that they impact an economy by creating a long-term lag. The economic conditions of a nation keeps on changing from time to time, hence, the policy impacts that result from a lag, can end up hitting an economy at inappropriate time, resulting to creation of an unstable economy in the long run. The second argument is that policymakers are supposed to stop interfering with the economy as it ends up making appropriate adjustments in the long run.

            I am in support of the use of active monetary and fiscal policy in an economy. First, when the aggregate demand in an economy keeps on declining it is the role of the government to employ the monetary and fiscal policy immediately with an objective of reducing high levels of unemployment that comes with the decline. For purposes of reducing the suffering of people in an economy it is appropriate to make use of active stabilization policies as basis of increasing AD in the short-run. Also, for purposes of dealing with short-term inflations, arising from unexpected expansions and contractions, it is essential to make use of active stabilization policies to ensure that levels of inflation, which makes the cost of living high, are dealt with in the short run (Kuncoro, 2015).

A Balanced Budget

            A balanced budget is one where the government expenditures are equal to the revenue available (Greiner, 2008). A number of arguments have been provided against and for a balance budget in an economy. One of the arguments for a balanced budget is that in the future debt spiral off might end up occurring creating financial crisis in the economy. The proponents of this argument indicate that in the future, there will be a time when investors in government bonds will end up having no faith of getting their money back resulting in high interest rates in the form of compensation associated with the expected high risk, and this will end up creating budget deficits, making the government to be in more debts in order to meet its day to day operational expenses and investment needs. According to Greiner (2008) indicates that many people oppose the idea of high debts due to the fact that they will be unattainable in the future. For example, when a government has a deficit it is forced to borrow more in order to meet the expenditure needs, and continues borrowing might end up leading to a situation the debt available is not sustainable at all. This means that the government will not be in a position to meet its debt obligations to the investors.

            However, one of the arguments provided against balanced budget is the fact that it is difficult for the government to achieve economic growth without having to borrow in order to invest in capital investment projects, which enable an economy to achieve an increment in AD demand, leading to high level of employment (Greiner, 2008). In addition, there are those who argue that it is difficult to have a balanced budget, given that the government will have more needs than the available finances and it is difficult to do away with certain expenditures, such as social welfare funds, and national defense spending, which creates budget deficit in most cases. Therefore, a government will be forced in most cases to borrow a lot of funds with an objective of meeting expenditure needs which are essential to making the life of its citizens better.

            I do not support the idea of balanced budget as it is not a good one of the long-term development of a country. First, I believe that government needs to borrow with an objective of increasing employment levels. The government has to spend more resources in capital projects, such as roads, and other major infrastructures with an objective of stirring long-term economic growth, which is essential in increasing AD, which contributes in making an economy attain high growth. In order to invest in most capital projects a government has to borrow as the existing revenues are usually not adequate. In addition, the government has to support social welfare programs and cannot do away with them as they are essential in ensuring that the quality of life for the low income households and individuals is improved in the long run. Thus, essentially, the government needs to borrow at times to continue supporting development and recurrent expenditure for the long-term well-being of its citizens.