Summary: goals of monetary policy, history of monetary policy in the U.S. economy. Inflation targeting, maintaining macroeconomic stability: assuring policy goals.
The main objective of any government fiscal policy is to sustain economic growth, price stability, and employment rates (Riley, 2006). In the U.S., the monetary policy is determined by the Federal Reserve System. The Fed has control over the money supply, buying and selling government bonds, interest rates, and the lending strategies of commercial banks (Riley, 2006). The Federal Reserve Act founded in 1913, was meant to “…stabilize markets, ensure prosperity for Americans, and take the power from powerful bankers…” (Zukowski, 2011). Despite poor judgments made by the Federal Reserve, such as easy lending, low-interest rates, and reckless market activities which contributed to the recent collapse. The Fed remains the primary monetary decision-maker in the United States.
Macroeconomics is a composition of collected data that banks and governments use to measure the national output, unemployment, and inflation rates. The accumulated information is then used to influence the nation’s economical growth (Heakal, 2011). The performance of the economy affects all sectors differently, thus, policymakers must take into account all aspects before implementing strategies to ensure prosperity within the country.
How do some principles of macroeconomic theory drive policy choices?
The primary goal in macroeconomics is to examine the overall movements and trends within the economy. Macroeconomic calculations use two methods: the fiscal policies, the balance between government spending and the level of tax collected, and the monetary policies, how much money is available for use. In the United States, these two strategies are controlled by two separate entities. The fiscal policy is managed by members of parliament, while the monetary policy is determined by the Federal Reserve System (Niles & Orden).
Although these two systems are independent of each other, they must work together to succeed in creating a strong and stable economy. Some of the contributing factors that policymakers must consider before the implementation of any strategies are the unemployment rate, national income, and price levels.
There are some differences in the economic effects of monetary and fiscal policies. A budgetary approach affects all sectors through the use of interest rates. A lower percentage generally leads to an increase in consumer and business spending, adding to the inflation rate.
On the other hand, a rise in government spending on social and employment programs usually result in higher interest rates and lower investments. Interest rates, exchange ratio, and government spending heavily influence the prosperity and growth of the nation’s economy.
Can there be more than one theory explaining the economy and if there is does that imply more than one policy response?
The modern-day economy is a highly complex system with many factors to consider when managing the national assets and debts. The country’s financial structure experiences different levels of prosperity, recession, and recovery, all of which have a different impact on industries, corporations, and individuals. Economic models are used to measure trends and behaviors throughout the fiscal year to maximize policy objectives and to help manage serious downturns. Policies implemented by officials to control the economic flow affect all industries separately. Tax hikes, for example, hurt the general workforce however allows for more government spending on social programs.
In the U.S., their largest assets come from agricultural trade. Procedures used by banks to level out inflation such as higher interest rates are harmful to the farming sector. The government will then issue a special tax break to farmers to avoid a financial crisis. A strong and stable economy implies the use of more than one objective to offset the harsh effects one course of action will have in each sector. This enables corporations and individuals to adjust more quickly to financial decline.
Due to the intricate nature of the economy, no model can be perfect. However, by continuously testing and revising protocols, decision-makers are forced to tighten their views about the nation’s finances and what should or should not be done to deal with market failures (Ouliaris, 2012).
Is there an ideal macroeconomic policy goal that policymakers should answer to?
The main focus of policymakers should be on economical stimulation and growth, to boost the nation’s financial recovery. In general, one policy tool should be assigned to one objective. For example, lowering or raising interest rates may be used to control inflation. On the other hand, changes to the tax system on consumer goods will increase productivity and job creation (Riley, 2006). Because macroeconomic policies encompass many factors that affect all industries differently, there is no general composition that can be implemented to reach all economical objectives effectively. However, special attention should be paid to the monetary policy. Its main purpose is in issuing currency and to control interest rates, the two most important factors to achieving a stable economy.
Has any aspect of what we learned suggested that there may be non-monetary policy and non-fiscal policy goals that could better serve to bring about growth in real GDP, full employment, and price stability?
The recovery of an unstable market requires the implementation of policies that will have a positive impact on all industries. In some cases, the use of non-monetary and non-fiscal policies are used. For example, a suitable wage strategy may be implemented to control product demand and rising prices. Wages would be set at a suitable level to match productivity, but would not increase with the demand.
Price control is another non-monetary procedure which is used to combat inflation rates. Cost increases are caused by an excess demand for consumer goods; placing a limit on basic necessity items reduces the supply need. Credit easing is used by central banks to improve liquidy and access to credit. Banks will lower interest rates for a specific amount of time to increase capital spending and attract investments (Ouliaris, 2012). Policymakers set financial goals to increase the nation’s economic profitability. Nonetheless, the implementations of non-monetary goals are a useful tool in attaining certain objectives.
The monetary management of a country relies heavily on the knowledge of how the economy works and the contributing factors that influence it. The calculations used to predict future events should be easily adjustable to include new data to implement the best solutions with issues involving economic growth, inflation, and unemployment rates. The success of any country is in the positive development of markets, and of how quickly policy actions are transmitted during a financial crisis.
Heakel, Reem. “Explaining the World through Macroeconomic Analysis”. Investopia. 2011. Web.
Niles, Katheryn. & Orden, David. “Macroeconmic Policies and U.S. Agriculture”. Southern Agriculture In a World Economy. n.d. Web.
Ouliaris, Sam. “Economic models: Stimulations of Reality”. IMF Institute. 2012. Web.
Riley, Geoff. “Government Macroeconomic Policy”. Eton College. 2006. Web.
Zukowski, Ryan. “The History of Our Monetary Policy and why we should change it”. CCNN.us. 2011. Web.