Active monetary & fiscal policy
The federal and the state usually employ various tactics to keep the economy running. The monetary law is toolkit used by the fed, and it entails carrying out an open market operation including the transformation of the reserve requirements as well as the interest rates of the federal funds. Fiscal policy, on the other hand, is a toolkit for the government that is inclusive of the art of changing the taxes and the spending of the government. These approaches can be actively maintained and only when the fed or the state makes a decision to apply the expansion law in which case they may choose an approach from the toolkit and put it to action. Even though the active policy is simple, it is prone to challenges. Considering that it usually bases on the procedures and knowledge of the law makers in the authorities, the weaknesses of the policy makers can be turned into official economy. While using active policies, the policy makers can make comments on one thing but then do another thing, and in the case, there can be benefits in influencing the public to appreciate that there is a difference in the economy and not seeing the difference itself ( Traum, Yang & International Monetary Fund, 2010 ).
The private merchants would in the case save more, but the investment would either rise or remain stagnant. It is thus evident that active regulations render the monetary and fiscal policies open to unintentional errors and also malicious, self-serving acts. However, among the benefits of active policy is that it gives the policy makers room to react to the changes in a technical economy and also run the economy in the desired direction. There is also the case of passive policy where the microeconomic rules are conducted as per the series of rules set earlier. These rules acknowledge most of the variables in microeconomics, and they dictate the best action for the conditions ( Stehn, 2009 ). The passive policy may choose to apply the law that to make the economy stable, interest rates have to be decreased one point anytime there is one percent decrease in the nominal GDP. However, regardless of whether the Fed or the government uses active or passive policy, there has to be a clear strategy to be associated with either to ensure the economy is up and running for the better.
Delegate your assignment to our experts and they will do the rest.
Balanced government budget
A balanced budget is where the revenues and the expenditures are equal, and the accounts are balanced with no deficit or surpluses. However, a balanced budget could equally refer to a budget with no deficits but possible surpluses. In most cases, a government is driven by political incentives and is made to spend more than it has those then results in a budget deficit that forces the government to borrow from the private investors. However, many economists believe that increasing taxes will lead a government to have a balanced budget. The proponents for a balanced budget have argued time and again that the deficits in a budget saddle the future generations with untenable debt. In the case, it comes to a time when the taxes have to be raised, or the money supply artificially increased and in the process devaluing the currency. Most economists feel that the budget deficits usually serve a valuable role and that the deficit spending is a reflection of the key tactics in the government's arsenal for fight recession. At a time of economic contractions, demand falls that often result in a gross domestic product is found to decline. Furthermore, since there is usually a rise in unemployment during the recession, the income tax revenue of the government always falls ( Baumol & Blinder, 2008 ).
To be able to balance the budget, the government will have to cut the spending to equal the lower tax receipts. The latter reduces the demand and further erodes the GDP and could throw the economy into a dangerous downward spiral. The proponents of deficit spending have argued that it stimulates a lagging economy as it infuses it with more needed capital. From such views, it is easier to believe in a balanced budget considering it reduces the interests and makes it easier for investors. In such a case, there is also increased saving and investment that would always offer security to the government and investors. A balanced budget is as well characterized with shrink trade deficit and also assists in a fast growth of an economy for a long time. Generally when the economy is facing a downturn, the government attracts a fiscal deficit, when there is growth, the deficit declines following the increased tax revenues and the low spending rates. Thus, while referring to a balanced budget, it is usually in the context of during the trade cycle. In the United States, each of the states, except the Vermont has a version of a balanced budget amendment that deters some deficits. The federal authorities lack such amendments. There is a golden rule that borrowing should be allowed to up to 3% of GDP ( Lee, 2011 ).
References
Baumol, W. J., & Blinder, A. S. (2008). Macroeconomics: Principles and policy . Mason, OH: South-Western Cengage Learning.
Lee, M. (2011). The freedom agenda: Why a balanced budget amendment is necessary to restore constitutional government . Washington, D.C: Regnery Pub.
Traum, N., Yang, S.-C. S., & International Monetary Fund. (2010). Monetary and fiscal policy interactions in the postwar U.S . Washington, D.C.: International Monetary Fund.
Stehn, S. J. (2009). Optimal Monetary and Fiscal Policy with Limited Asset Market Participation . Washington: International Monetary Fund.
