Macroeconomics deals with the trends and movement in the economy as a whole. It is a field of economics that deals with the study of the behavior of the economy. Macroeconomics deals with different issues such as national income, total savings and investment, total demand, total supply, and general employment. Macroeconomic issues come about when the economy does not adequately achieve its goals of stability, economic growth, and full employment. This paper discusses the active monetary and fiscal policy and a balanced government budget by evaluating the advocates’ and critics’ position and determining a position for support.
Active Monetary and Fiscal Policy
Governments usually try to influence macroeconomic outcomes by relying on two primary methods; monetary policy and fiscal policy. The monetary policy deals with the management of money supply and the interest rates by the central banks. Fiscal policy is used to determine the various ways in which the central government earns its money through taxes and the expenditure of the money. The fiscal policy simply refers to the taxation and spending policies of a country’s government. A fiscal policy which is tight or restrictive will entail various endeavors such as cutting back on government spending and the raising of taxes. An expansionary or loose fiscal policy does the opposite and can be used to encourage economic growth.
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Advocates of the monetary policy state that it controls inflation and encourages targeting of interest rates. Such a control of inflation to make sure that it occurs in small amounts is good for the economy because it allows workers to earn higher wages and encourages future investments. Monetary policy can be easily implemented by the central banks and can yield significant results in the market. The fact that central banks are politically independent means that the monetary policy can be executed without any political interference (Davig and Doh,2014). Weakening the currency through lowering interest rates and increasing money in circulation can be used to boost exports.
Fiscal policy will ensure that the government directs its spending on specific critical areas. The effects of the fiscal policy can be seen much faster because it has a short time lag. The government can use fiscal policy to easily raise taxes, cut its spending, control inflation, and cool the economy down. In case the economy is in recession, the government can decrease the rates of taxes, increase investment and in order to boost the economy.
Critics of the monetary policy note that it can cause hyperinflation because setting interest rates to be too low could lead to over-borrowing. Adding too much money to the economy can also result in hyperinflation as more money circulation will lower the value of a unit worth of currency. Monetary policy effects usually take several years or months to materialize. It can thus cause disastrous long-term effects without even boosting the economy. Monetary policy is faced with various technical limitations of interest rates. The lowest interest rates which can be adopted by the central bank is zero. This means that the central bank has a limitation on how much low they can choose to go.
Critics of the fiscal policy note that spending high amounts and taking taxes to be too long for a long time can lead to budget deficits which can go to dangerous levels when not controlled. In case the government spends more money on its imports, it results in an outward flow of money instead of a local circulation. The fiscal policy also leaves an open door for tax incentives and spending on imports. It may be politically motivated and can result in increased taxes (Evans et al., 2016).
I would support the position of active monetary and fiscal policy initiatives. Both initiatives can be used to balance the economy in case of an economy that is in recession or if it fast-paced. The strength of the economy is always shifting and there has to be a proper means of control. However, monetary policy should be used carefully because the results take long to materialize and could result in long-term disastrous effects.
Balanced Government Budget
A budget is an outline which shows the revenues and expenditures of a government for a specific period of time. Balanced budgets usually have equal revenues and spending while deficit budgets usually have low revenues and high costs. The Federal government creates a deficit budget every year. Shortages on budgets usually carry a huge load on the generations to come. The load is usually offset by lowering incomes and raising taxes. An economy that has a huge debt usually has its debt will have its debt on the continuous rise as long as the government’s revenues are lower than the expenses. In order to alleviate government spending debt, protective measures such as a plan for a balanced government budget has been proposed.
Those in favor of the balanced budget offer many claims about the disastrous effects of having a huge federal debt. A balanced government budget can provide the right growth and progress without adding any additional government budget. The balanced budget should be able to pay future bondholders nominal payments which are proportional to the money they lent. This is a better option compared to taxing future generations for current day expenses. Various government activities and expenditures usually hurt the economy. A balanced government expenditure is thus going to help inflations and reduce inefficiency in spending. Without a balanced government budget, the United States government becomes highly vulnerable to increase in interest rates. Debt repayments would be a difficult and expensive process leading to inflation.
On the other side of the argument, economic theorists try to point out that the increase in spending can assist the economy in fighting recession. The try to show that increased government purchases are more important than having a decrease in taxes. The tax burden of not having a balanced government budget is mostly exaggerated (Azzimonti et al., 2016). The country’s budget is usually a piece of a bigger picture and getting rid of budget deficits can be somewhat misleading. A single-minded focus on a balanced government budget removes the focus from other policies which can be used to redistribute income in future generations. Many critics of the balanced government budget argue that the deficit may not continue to rise forever. As long as the nation’s income grows faster than its debt, then the ability of the nation to repay its debt will increase.
Views from the advocates and the critics show that the critics have a stronger point. Trying to focus on a balanced government budget could put a huge burden on the economy, leading to recession which has disastrous results. The main point of the advocates of the balanced government budget is that it would lead to an unjustifiable budget on future generations through the raising of their taxes and lowering of their incomes. However, the increase in taxes is usually over-exaggerated. The focus on a balanced government may also obscure other policies and ways which taxes can be reduced for future generations.
In conclusion, monetary and fiscal policy are initiatives by try and balance the economy in different situations. Proper utilization of an active monetary and fiscal policy can have beneficial results on the economy. A balanced government budget ensures that means that the federal budget should have its expenditures and spending balanced. Doing this could put a burden on the economy and may lead to a recession.
References
Azzimonti, M., Battaglini, M., & Coate, S. (2016). The costs and benefits of balanced budget rules: Lessons from a political economy model of fiscal policy. Journal of Public Economics , 136 , 45-61.
Davig, T., & Doh, T. (2014). Monetary policy regime shifts and inflation persistence. Review of Economics and Statistics , 96 (5), 862-875.
Evans, G. W., Honkapohja, S., & Mitra, K. (2016). Expectations, stagnation and fiscal policy.
