The paper "Use of Fiscal and Monetary Policies to Stabilize Economy" is a wonderful example of a report on macro and microeconomics. Governments adopt different methods to stabilize the economy during recession, with some of the major ones being fiscal and monetary policies. Factors that influence economy, such as changes in employment levels, demand for goods and services, as well as price stability, may fluctuate with time due to both internal and external forces. This will call for government interventions to bring about macroeconomic stabilization, using either or both fiscal and monetary policies.
Fiscal policy refers to government policies on tax and expenditure aimed at increasing or decreasing aggregate demand through manipulation of government expenditures and taxation. A government can stimulate economic growth and employment through an increase in government expenditure, decrease in taxes or other manipulations that affect aggregate demand in the move to stabilize the economy. On the other hand, economic stability of a nation may be influenced through monetary policy in which the central bank controls the levels of national output and price levels through variations in money supply.
For example, an increase in money supply result in lower interest rates that stimulates private and public spending with direct positive impact on the economic growth. In order to limit the growth rate in money supply, the central bank, or Federal Reserve must allow interest rates to increase to relatively high levels, making impossible to fix the amount of credit and costs independently. The fiscal and monetary policies are quite independent in that monetary policy falls under the central bank or Federal Reserve while the government controls fiscal policy to necessitate achievement of certain common goals. This paper seeks to expound on government’ s application of fiscal and monetary programs in stabilizing the economy and effectiveness and limitations of these policies. Use of Fiscal Policy to Stabilize Economy The fiscal policy approach of stabilizing the economy finds its roots in Keynesian economics school of thought, which supports the use of government spending and taxation to help even out economy.
Keynes discovered this policy during the Great Depression in which he believed that forces of supply and demand remained too low in recessions as well as unemployment that translated to low spending among the people.
In such occasions, he suggested that government should intervene through increasing its spending to restore the economy to normal status.
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