Macro-Economic Theory
Macro-Economic Theory
Question 1
Fiscal policy: Fiscal policy refers to a tool used by the government to regulate the economy. This mainly comprises of platforms such as tax and revenue collection tools. Ineffective fiscal policies can easily derail economic growth rates in any country (Rittenberg, 2008).
Monetary policy: this refers to a tool used by the prevailing monetary authority in a country to regulate the flow of money. This mainly comprises of interest rates. The absence of an effective monetary policy can cause undesirable economic perspectives such as inflation (Mankiw, 2011).
Question 2
Open market operations comprises of the process of trading government securities in order to enhance or minimize the amount of money within the banking framework. In essence, such trading must occur in an open market. An example is the sale of government bonds.
Reserve requirements encompass the minimum amount of money that commercial banks should deposit with the Federal Reserve Bank. This is an essential component of the monetary policy (Mankiw, 2011). An example is when the Federal Reserve sets the minimum balance at $50million for all commercial banks.
Discount rate refers to the rate charged by the Federal Reserve when offering short term loans to commercial banks or other suitable institutions (Rittenberg, 2008). For instance, the Federal Reserve might set the discount rate at 14%.
Question 3
Scenario (a)
The decision to fight childhood obesity represents neither fiscal nor monetary policy. This is a decision that does not have direct implications upon the economy. In essence, it mainly affects health standards in the country.
Scenario (b)
The abolishment of the Department of Education represents a fiscal policy. This is because the decision will minimize the expenditures for the federal government. However, this decision does not represent monetary policy because it has no implications of the amount of money in circulation.
Scenario (c)
The decision by the president represents fiscal policy. This is because the regulation in the sale of automobiles will have implications on the money available to the government in form of revenues. It does not fall under the category of monetary policy because it has no implications on interest rates.
Scenario (d)
This decision represents monetary policy. In essence, the move seeks to maintain the prices of oil at affordable rates. This directly affects the flow of money within the United States economy. Failure to implement this decision might cause an escalation of inflation rates (Rittenberg, 2008).
Scenario (e)
The decision to lay off teachers by authorities represents the fiscal policy. Through retrenchment, the government minimizes a lot of expenditures (Mankiw, 2011). Consequently, it can reallocate the finances to other pertinent sectors of the economy. This enhances economic stability.
Scenario (f)
The inspection of the country’s nuclear plants does not affect the monetary or fiscal policies. In essence, this is a decision that only the affects the security of the country. Although security might have implications of upon the economy, the inspection of nuclear plants does not affect the monetary of the fiscal policy.
Scenario (g)
This decision represents a fiscal policy. Any form of amendment or adjustment into the country’s tax policies affects the fiscal policy. This is because it affects the availability of money to the federal government. Tax deductions also affect government’s spending in terms of the budget plan (Rittenberg, 2008). All these perspectives justify this decision as having implications on the fiscal policy.
Scenario (h)
This decision represents monetary policies. The regulation of the circulation of currency in the economy is among the most pertinent functions of the Federal Reserve. Consequently, this decision has direct implications upon the country’s monetary policy. This decision does not represent fiscal policy because it does not affect the total funds accessible for the government.
Scenario (i)
The reduction of interest rates by the federal government represents monetary policy. Such a decision affects the amount of money available within the country’s banking systems. Higher interest rates reduce the currency flow while higher interest rates increase the flow (Mankiw, 2011). All these perspectives justify the effect of this decision on the monetary policy.
Scenario (j)
This decision by the president represents fiscal policy. All forms of tax intervention mechanisms influence the government’s expenditures and the collection of revenues (Rittenberg, 2008). The tax incentives proposed by the president will increase the expenditures of the federal government. Consequently, this decision represents fiscal policy.
Scenario (k)
This open market operation by the Federal Reserve represents monetary policy. The Federal Reserve is the highest government authority for making monetary decisions (Rittenberg, 2008). By purchasing $10 billion treasury securities, the Federal Reserve will reduce the amount of currency circulating in the economy. Consequently, this decision affects the monetary policy.
Scenario (l)
The bailouts of General Motors & Chrysler represent fiscal policy. This decision directly affects the government’s budget in terms of expenditures. If the government fails to bailout these companies, it would undermine the performance of the economy. For instance, the collapse of such companies might lead to an escalation of the rates of unemployment in the country. Consequently, this decision affects the government’s fiscal policy.
References
Mankiw, G. N. (2011). Principles of macroeconomics. Mason, OH: South-Western
Rittenberg, L. & Tregarthen, T. (2008). Principles of microeconomics. Nyack, NY: Flat World Knowledge
Is this your assignment or some part of it?
We can do it for you! Click to Order!
