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One of the largest debates in macroeconomics is centered around control. Control is an issue and a problem in so many countries over so many resources and activities, it makes perfect sense that control over resources and money within a country would stir up controversy as well. This paper will discuss how and why the Government and Central Banks manipulate the short-term fluctuations in the economy through the utilization of monetary and fiscal policy. Furthermore, it will discuss why this is intended as a positive behavior or action but can turn out to be the opposite. As with most rules, if not all, regulatory standards, guidelines and actions are meant to protect and grow. Sometimes, when used in excess, or wrongly, the intentions do not matter, as the result is disastrous and affects populations on a National scale as well as a worldwide one. “By “leaning against the wind” of economic change, monetary and fiscal policy can stabilize aggregate demand and, thereby, production and employment” (Mankiw, 2015, Pg. 508). Another debate which is highly argued in macroeconomics is whether the Government should be forced to balance the budget, how to do so, and what the overall results will be for all individuals affected.
“Monetary policy affects aggregate demand primarily by changing interest rates, which in turn affect spending, particularly residential and business investment” (Mankiw, 2015, Pg. 508). When consumers see interest rates changing, their behavior changes. This includes spending more or spending less, investing money, buying vehicles or homes, and altogether stimulating the economy. Businesses also follow this trend. Bankers are especially aware of how the interest rates will bring in more customers or scare more customers away. This is why there are at the very least, weekly meetings to discuss the interest rates and these affects of the various investment vehicles or lending vehicles financial institutions offer. Monetary policies can and should be utilized as a very efficient tool, but when the rates are fluctuating continuously, it causes the Feds to lose credibility and in turn makes consumers warier of spending or investing their money.
There are several ways in which monetary policy influence the economy by influencing and controlling Financial institutions overall. Some of these methods are utilization of the discount rate, short term institution loans, reserve mandates, open market operations, and interest payments on demand (Gordon, 2012). The utilization of these and other tools at the Feds’ disposal is necessary to ensure fluctuations in the economy are not as hard felt as in the Great Depression. If the monetary policies purposefully hinder the market as a way to accomplish another goal, this is wrong. No issue is black or white. Monetary policies are a necessary evil in order to keep everyone on the same page and ensure everybody that has a high interest or low interest in the financial institutions are protected against large fluctuations long-term.
“Fiscal policy works with a lag because of the long political process that governs changes in spending and taxes”(Mankiw, 2015, Pg. 509). The Government essentially takes as long as possible to debate any and every spending decision and is typically overspent. This has been an issue for many years. Although the Government is able to delegate to others how they will spend their earnings through the utilization of taxes, tax payers have little say in what tax hikes will take place. The individuals that are affected the most are the middle class, which live paycheck to paycheck. The utilization of fiscal policy has good intentions; however, it does not always take the big picture into account. It looks at how it will affect the wealthy and the poor, but seldom does it look at the middle class, which are essentially stuck with all fiscal decisions made. When tax rates increase or decrease, spending and economics in general, are affected. Inflation is affected. Unemployment rates are also affected. Fiscal policy is therefore much like a super power that can be used for good or evil.
There unfortunately is no cut and dry answer to whether fiscal and monetary policies help or hinder an economy. They can help at times by stimulating investments, growth, production, employment, and spending. They can also stifle the economy by pressuring the businesses, individuals, and Governments to pay more than they should because the budget is hard to balance. “In the globalised world of the past decade, the characteristic movement of the real economy in Europe has been in the lower amplitudes of the economic cycle and has been complicated by the low effectiveness of fiscal and monetary policy tools and instability on the financial markets, which, in relation to the real economy, display features of autonomy and virtuality” (Danhel, Duchácková, &Radová, 2016, Pg 1). The same can be said of the United States. Sometimes powers are abused or used against each other, which ends up being a wash. Nothing is accomplished, and nobody benefits from this. Both monetary and fiscal policy have the power to stabilize the economy and that is exactly what they should be used for.
It is the Government’s responsibility to have a balanced budget. Unfortunately in an attempt to balance a budget, a new jet may be purchased while the man power of a particular military unit is cut. This is not only inappropriate but should be illegal. For politicians to use the tax payers’ money to lavish themselves is ridiculous. Often times, the military men and women as well as the civil servants suffer because they are so short staffed, they cannot function at full capacity and in turn, get burnt out. The budget must be balanced, but not at the expense of the middle-class men and women who work for the Government.
The Government has many tools and means at its disposal to alleviate pressure from consumers and businesses alike. Rather than having people in power that only represent the wealthy businesses or their own interests, politicians need to be elected that are savvy with the budget and the economy overall. Monetary policy and fiscal policy have their flaws when they are not utilized correctly or efficiently. They also have great power for long term growth and advancement of an economy not only on a National level, but also on a Global level. The Government does, and should continue, to have the power to manipulate the economy using tools at its disposal but should not be allowed to abuse these tools for self-gain. Ethics need to come into account. “It might be desirable if policymakers could eliminate all economic fluctuations, but that is not a realistic goal given the limits of macroeconomic knowledge and the inherent unpredictability of world events(Mankiw, 2015, Pg. 509). The Government should be held accountable for their decisions that affect the market and the economy. This includes balancing the budget. This should be a requirement no matter what, and if the budget is not balanced, the difference should come out of the highest paid individuals in the White House.
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