Fiscal And Monetary Policy
Impact Of Expansionary Fiscal And Monetary Policy On The New Zealand Economy Recession in economics is essentially a general slowdown in economic activity in a country over a sustained period of time. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, household incomes and business profits all fall during recessions. The primary indicator for determining whether a country is in recession is by its GDP. Recession can be simply defined as two consecutive quarters of negative growth i.e. Negative GDP, thus based on an assessment by the New Zealand Treasury, New Zealand has officially been in recession since the second quarter of 2008. [2] Recession leads to expansionary fiscal policies by the Government accompanied by similar monetary policies by the respective Reserve (Central) Banks as is the case with New Zealand as well, where in an effort to stimulate demand and restore the economy the Government and the Reserve Bank have embarked on expansionary fiscal and monetary policies respectively. This can further be seen in the figure below that outlines the current recessionary state of the New Zealand economy as well as the impact that the expansionary fiscal and monetary policy aims to achieve in terms of stimulating demand that will consequently lead to putting New
Fiscal policy is powerful while monetary policy is weak. Discuss.
Title Fiscal policy is powerful while monetary policy is weak. Discuss. Fiscal policy is powerful while monetary policy is weak. Discuss. National governments have two tools available to them that they can use to influence national income. These are fiscal policy and monetary policy. Fiscal policy is "the expenditure of a government to provide goods and services and the way in which the government finances these expenditures"{Sooran C. Victory risk management consulting, Inc. (2001)}. Monetary policy is policy that aims to control aggregate demand and ultimately inflation through changing the short-term interest rates {official Bank of England website (2002)}. The aim of this essay is to discuss the statement 'Fiscal policy is powerful while monetary policy is weak.' To achieve this the essay will focus on the effects of fiscal policy and monetary policy during a recession and during a boom. It will also examine the effects of both policies in a fixed exchange rate regime and a floating exchange rate regime. Through this discussion the essay aims to show the reader that there is no clear winner between monetary and fiscal policy. Both policies can be strong or weak dependent on the current position of the economy. In the AD - AS model we see that when prices are flexible there becomes a long run level of national income. As national income increases prices
In the AS-AD model, the aggregate demand curve is vertical or downward sloping while the aggregate supply curve is vertical or upward sloping. Explain why this is.
In the AS-AD model, the aggregate demand curve is vertical or downward sloping while the aggregate supply curve is vertical or upward sloping. Explain why this. Aggregate demand is defined to be the total amount of goods and services that household, businesses and governments wish to purchase at some period in time. Aggregate demand is the basic driving force in an economy. National economic policies are designed in an attempt to influence AD in one way or another so as to reduce unemployment or lower inflation. Most AD curves are drawn with a fairly steep slope to show how changes in price level produce changes in the amount of goods and services that are demanded in an economy. However we have to remember that the effect of price is not really so large in the short run. In the real world, factors such as level of income and standard of living are more important than that of price when purchasing goods and services. This would suggest that the AD curve should be drawn more vertically to point out that AD does not change very much when prices change. In the long run, consumers adjust their spending habits in response to changing prices, and then the slope of the AD curve may change. When looking at the aggregate demand curve we also have to look at the ISLM model, in particular the IS curve and how it is derived. Looking at the graph below, if interest rates are at
Using IS/LM model, discuss the extent to which price flexibility can return and economy to full employment. Explain how the analysis can help account for Japan's recent slump.
Using IS/LM model, discuss the extent to which price flexibility can return and economy to full employment. Explain how the analysis can help account for Japan's recent slump. In this essay, ISLM will be defined and it will be used to explain what it gives us, in terms of solution to the economy. The focus will be on price flexibility, showing how it can restore and economy back to full employment using the ISLM model. The Classical and Keynesian view of price flexibility will be discussed to show whether it can restore and economy to full employment. Following this, the Keynes effect will be discussed and criticised in relation to ISLM model. All this will be linked into the Japanese economy to help identify the cause of their recent slump. The ISLM model consists of two model which are, Investment and Savings (IS) which is in the goods market and liquidity preference and money supply (LM) is in the money market. The IS curve is downward sloping and relates output to the interest rate whereas the LM curve is downward sloping and related interest rate to output (Blanchard. 2006). It has a fixed price version and a flexible price version. Real money balances can be changed because of flexibility of prices. The Classicals believe that money is neutral and even if there is a reduction or an increase in the supply of money, the price level is changed but there is no effect on
Expectations in Economics
Expectations in Economics Expectations play a major role in determining the behaviour of the economy. How agents respond to change in policy determines the size and sometimes the direction of the economy's response to the change. The importance of expectations is an old theme in macroeconomics. Nearly all the economic decisions people and firms make - whether to buy bonds or stocks, whether or not to buy a machine depend on their expectation of future profits, or future interest rates. In real world people form expectations for every activity they do. When it comes to economic activity the agents in the economy also form expectations. These expectations can be in relation to expected rise or decrease in price of any goods or services. Therefore the policy maker's should take into account the expectations of the people. Until 1970, macroeconomists based the formation of expectations on animal spirit and backward looking rules. These were called as regressive expectations or adaptive (error learning) expectations. In early 1970 Robert Lucas and Thomas Sargent argued that economists should assume that people have rational expectations that people look to the future and do the best job they can in predicting it. Economists work with many scenarios for how managers, workers, and investors go about forecasting the future and forming their expectations. The main formulations about
Explain what is meant by the "natural rate of unemployment", what factors influence it, and what can be done to reduce it?
3... Explain what is meant by the "natural rate of unemployment", what factors influence it, and what can be done to reduce it? It was Milton Friedman who first thought up the concept of the 'Natural Rate of Unemployment' (NRU), when he realised that full employment could not be reached to the level of 100% of the population, chiefly due to the fact that people are constantly being fired, laid off or moving between jobs. At the same time Friedman was aware of the importance of dealing with unemployment in relation to the economy so that no detrimental effects would be seen. In order to illustrate what is meant by NRU, I will refer to the types of unemployment, the Phillips curve and NAIRU, to then demonstrate effective policy measures. Unemployment is distinguishable into four categories; Cyclical, Frictional, Structural and Seasonal. Cyclical unemployment occurs when there is insufficient demand in the economy for all workers who wish to work at current wage rates to obtain a job. Frictional unemployment refers to the movement of labour from one work place to another. Structural unemployment occurs when the supply of labour exceeds demand, this is often caused by a change in pattern to demand and production procedures leaving workers unemployed in labour markets where demand has shrunk. Seasonal unemployment is fairly self-explanatory. Father Christmas tends to only be in
Explain the impact of introducing the Minimum Wage on incentives to work
Explain the impact of introducing the Minimum Wage on incentives to work The minimum wage was first introduced in the UK by the Labour government in April 1999. The rate then was £3.60 for adults over 22 and for 18-21 year olds it was £3.00. To this date the minimum wage rates have increased from £3.60 to £5.52 and £3.00 to £4.60. The reason the Labour government introduced this legislation was due to the number of low paid workers within the UK, and since the introduction of the minimum wage it has been reviewed and increased in the month of October of each year. In this essay I shall state clearly what impact the minimum wage has on the incentive to work for different groups of people for example, women, those who are from poorer backgrounds and unskilled. I shall also look at what impact it had on employment within UK and furthermore what impact it had on benefits within the UK too. From the introduction of the minimum wage there appeared to be a large increase of women in the work force. The minimum wage allowed single mothers; married women with children etc to get part-time jobs and get paid a fair amount for the hours of work they have performed there for allowing them to earn an income for their household as well as taking care of other responsibilities i.e. children. 'Some 1.3 million workers benefit from the minimum wage. The main beneficiaries have been
Business Cycles: Meaning and Nature
BUSINESS CYCLES AND MACROECONOMIC POLICY INITIATIVES BUSINESS CYCLE Today we are faced with higher unemployment levels, deflation in farm prices, disinflation in industrial prices, and inflation almost everywhere else. These are cycles in all spheres of human endeavor, from stocks and bonds to commodities and political preferences and are generally known as business or trade cycles. In this chapter, we discuss: Meaning of business or trade cycles Types of cycles Various phases of cycles Three important theories on business cycle Various remedial measures to rectify economic imbalances caused by these trade/business cycles Various business indicators and their practical applications in: Forecasting recession Buying and selling of stocks MEANING Business cycle or trade cycle is a part of the capitalist system. It refers to the phenomenon of cyclical booms and depressions. Most acceptable definition is that given by Mitchell, "Business cycles are a type of fluctuations found in the aggregate economic activity of nations that organise their work mainly in business enterprises. A cycle consists of expansions occurring at about the same time in many economic activities followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic....". An important
Both the US and countries of the European Union make up the largest consumer markets in the world and therefore any impact on their economies would have a knock on effect on other smaller countries. This is a result of globalisation. There are a number of
If an economy is in a state of long run equilibrium, a crash in the stock market will cause aggregate demand to fall. The following diagram shows this: AGGREGATE DEMAND AND SUPPLY PRICE LEVEL REAL GDP A fall in aggregate demand causes the aggregate demand curve to shift leftwards in the short run. This results in a decrease in real GDP and a decrease in price as shown in the diagram above. At the intersection between the new AD curve and the SAS curve, the economy is in below full-employment equilibrium. Potential GDP is greater than real GDP and there is a recessionary gap. In the short run the money wage rate is fixed and it does not adjust to move the economy to full employment. Aggregate demand is represented by the equation: Y = C + I +G + X - M. Therefore a fall in aggregate demand will lead to a decrease in consumer spending, government expenditure, investment and net exports. Real GDP and prices will decrease. (Parkin, M. 2008.pp635-654) As aggregate demand decreases, firms will need to cut back on production as they are now producing more than is being demanded. This cut back in production will lead to an increase in the unemployment rate, as fewer workers are required to satisfy this lower demand. The unemployment rate is inversely linked to changes in real GDP. Therefore as real GDP decreases, the unemployment rate increases. ("Aggregate demand and supply".
Down the US route
Down the US route Summary Due to the rapid expansion of the British national system, higher education institutions were led to expand cheaply. The Guardian highlights changes in the government policy, which are increasing the number of students entering higher education. Research expenses with high fixed costs are outpacing inflation and worsening the financial situation. Government decisions to build new and upgrade existing universities, has enabled the academic community to prosper. The UK higher education system has expanded in two phases; Firstly Robbins (1960) encouraged low-cost polytechnics with a "mission to teach not to carry out research" [1]. Secondly in 1992 it was hoped that the abolition of the binary line separating polytechnics and universities, would produce funds to support the British research mission, it was however, unsuccessful. Differential funding is still in place and is reinforced by a large and costly structure of audit, assessment and exercise. This has led many universities into debt. Few, but some universities are still regarded as elite and others are incurring the problem of having to recruit poorly prepared students. The public institutions hoping to move upwards on the prestige scale are finding it difficult, as funding remains variable. This is because it is impossible for the government to fund an indefinite number of research