The paper "Reducing Unemployment by Monetary Expansion" is a great example of a report on macro and microeconomics. It is the role of the government to control economic performance. Two main policies are used in controlling economic performance; the monetary and physical policies. Under the monetary policy, the government controls economic performance by adjusting the money supply while under the fiscal policy, economic conditions are controlled by regulating government expenditure. The two are controlled through two markets; the goods market is also known as the product market and the money market where the goods market is represented by the Investment Savings function while the money market represented by the Liquidity Money function (Abel 2001).
The IS and LM curves as demonstrated by the below graph. The best policy to stabilize output when external shocks change the demand for goods and services. Economic shocks that arise from exogenous changes in the demand for goods and services leads to an outward shift in the IS curve. Increased demand for goods and services comes as a result of more money in circulation in the economy since income is an increasing factor in the demand for goods and services.
The best policy to control this excess demand for goods and services is by adjusting the quantity of money supply while holding the interest rate constant. Contraction fiscal policy can be used to reduce the quantity of money supply in the economy. Reducing government expenditure on goods and services will reduce the level of income earned by individuals (Sloman 2003). As income increases, the demand for goods and services increases while income reduces; individuals reduce their level of consumption for goods and services.
The reduction of government expenditure will shift the investment demand function (IS curve) backward to the original equilibrium and hence output stabilized. The following graph demonstrates the situation. The best policy to stabilize output if external shocks lead to changes in the demand for money Individuals demand more money when the interest rates are low. This is because the low-interest rates give low returns and so people are discouraged from saving their money and also borrowing money from the bank is cheap when the interest rates are low.
The increase in money demand makes the LM curve to shift leading to disequilibrium in the product and money market. The best policy to stabilize output under this situation is by adjusting the interest rates while holding the money supply constant (Williamson, 2005).
Abel, A. B. (2001). Macroeconomics (4th ed.). Boston: Addison-Wesley.
Blanchard, O. (2010). Macroeconomics. Upper Saddle River, N.J.: Prentice Hall.
Bodie, Z. (2005). Investments (6th ed.). Boston, Mass.: McGraw-Hill Irwin.
Brooman, F. S. (2006). Macroeconomics (4th ed.). London: Allen & Unwin.
Brooman, F. S. (2013). Macroeconomics (4th ed.). London: Allen & Unwin.
Dornbusch, R. (2010). Macroeconomics. New York: McGraw-Hill.
Dougall, H. E. (2013). Investments (8th ed.). Englewood Cliffs, N.J.: Prentice-Hall.
Mankiw, N. G. (2007). Macroeconomics (6th ed.). New York: Worth Publishers.
Samuelson, P. A. (2001). Economics (12th ed.). New York: McGraw-Hill.
Sloman, J. (2003). Economics (5th ed.). Harlow, England: Prentice Hall/Financial Times.
Williamson, S. D. (2005). Macroeconomics (2nd ed.). Boston: Pearson Addison Wesley.