Principles of Macroeconomics (Essay Sample)

Principles of Macroeconomics
Student’s name
Course name and number
Instructor’s name
Date submitted
Expansionary Economic Policy
Introduction
It is evident that the economic events, which have taken place recently, have led to a dire need of the people in America to call on their noble government to make effectively use of its legislative power through implementing various expansionary economic policies. The implementation of these expansionary economic policies will greatly assist the country to stabilize the already fluctuating economy through various valuable efforts. To be very specific, the government has indeed strived to utilize numerous monetary policies and expansionary fiscal policies to achieve this objective. Such fiscal policies that were utilized by the government affected government spending and the country’s taxes both negatively and positively (Amacher & Jennifer, 2012). These fiscal policies also affected employment, the GDP (Gross Domestic Product) as well as the aggregate demand. On the other hand, monetary policies utilized adjusted the required discount rates and reserve ratio and this led in the selling and purchasing of the government securities. Ideally, the government has the sole responsibility of taking appropriate action when the country encounters economic recession through engaging in various expansionary economic policies (Amacher & Jennifer, 2012). This study will expound on the expansionary economic policies, which the government utilizes in economic recession times, and they include the Monetary Policy and the Fiscal Policy.
Expansionary Fiscal Policy
The government utilizes the Expansionary Fiscal Policy to stabilize and affect the entire economy. Expansionary Fiscal Policy is mainly a unique method of government policy, which includes a supple taxes decline, government purchases increment, and an increment in transfer payments (Alesina, 2012). All these noble changes are mainly designed to ensure that they seal the recessionary gap whereas increasing the economic stimulus packages, which are aimed at decreasing the high rate of unemployment. It is paramount to note that the introduction of the Expansionary Fiscal Policy by the government will normally happen during the anticipation of various business-cycle contractions. An increment in government spending will lead to an increase in aggregate expenditures as well as increase the aggregate demand. Any Expansionary Fiscal Policy downside will lead to budget deficits, which will lead to the government having smaller surpluses (Alesina, 2012).
In any developed country, which includes the U.S., fiscal policy is mainly an integral tool utilized to ensure the country’s economic stability. The fiscal policy is mainly utilized as an effective tool, which assists in expanding the country’s economy and for it to work; the government has to implement necessary adjustments mainly in its spending and taxes (Amacher & Jennifer, 2012). These adjustments result to changes mainly in employment, the GDP and, the aggregate demand. The fiscal policy is therefore an integral tool which manages the country’s economy through its ability to affect the overall output produced amount in employment and aggregate demand.
The notion of adjusting government spending and taxes during economic recession times should ideally be compensated through a surplus during the times of booms. The fundamental objective for adjustments is to ensure the stability of the tax rates as well as to enable the deficit to fluctuate effectively mainly over the cycle (Buena-Bontas & Petre , 2009). Any increment in taxes during recession times and a reduction during a boom would be an economical sabotage, which should never be allowed. In addition, on the side of spending, the automatic stabilizers should be allowed to perform their work and it is possible to allow an increment in unemployment compensations during the recession times. In case of any deficit, the increment in unemployment compensation should still be allowed since it is compensated for through the surpluses when eventually the recession ends. This scenario ultimately shows that balanced budget regulations are indeed a negative perception since it balancing the budget each period is against the stipulated basic tax smoothing economic principle. Tax smoothing is integral since it enables the economy to fluctuate effectively on its own without external intervention. Tax smoothing enables the economy to go through various economical phases such as the economic booms and the natural recession whereas any overcorrection would result to the economy being thrown into an undesirable spin (Buena-Bontas & Petre , 2009).
The Gross Domestic Product, taxes, and government spending are forever intertwined since any effect of a decrease or an increase on one of them will evidently have an implicit effect on the other aspects. During a recession, if tax revenues increase, then the Gross Domestic Product deficit will eventually go up (Amacher & Jennifer, 2012). On the other hand, it is extremely hard to predict and know how each aspect affects the other because the GDP deficit may not have been the cause of the recession but more of the recession itself. It also becomes typically difficult to isolate effectively the fiscal policy effects especially during tax changes because tax multipliers are usually higher as compared to the spending multipliers. It is paramount to note that Expansionary Fiscal policy is never a principle of cur and dry because there are numerous factors, which work simultaneously, and this makes it increasing difficult to be able to isolate the major reasons that cause the recessions (Amacher & Jennifer, 2012).
Any Fiscal Policy requires effective and efficient actions, which will not and cannot be agreed upon fully, regardless of the wrong or right government action in protecting unemployment as well as pushing the economy in the correct direction to recovery. Recent research conducted by authoritative economists of both school of thoughts has shown that they all agree that indeed the economy moves automatically to a national income level whereby aggregate expenditure equals total output (Buena-Bontas & Petre, 2009). This is also applicable where injections equal leakages. However, such an equilibrium level will not necessary lead to a full resources employment since governments are required to respond effectively to unemployment levels with Fiscal Policy. Thus, the government must increase the AE (aggregate expenditure) high enough to make sure that there is a socially and desirable income and output equilibrium level. In rundown, the economy will normally mend its own wounds although it will be unable to heal in the most effective way. This will make the government to intervene so that it can lead to the maximization of the economic recovery (Alesina, 2012).
In addition, these procedures are usually carried out with strategy and intent although there are some, which happen automatically. Thus, these automatic stabilizers are mainly mechanically changing systems of transfer payments and tax collections, which respond in accordance to the national income changes that are necessary in closing the recessionary gap. There is evidence of previous fiscal policy policies and they include the 1985 Gramm-Rudman-Hollings Act whereby President George Bush’s tax and spending caps increased. The other example is includes the deficit reduction programs which were introduced by President Bill Clinton that involved lesser government spending as well as increased taxes (Buena-Bontas & Petre , 2009).
In Expansionary Fiscal Policy, there are three major tolls, which the government utilizes, and they include transfer payments, taxes, and government purchases. Government purchases mainly involve increased funds that are appropriated to various agencies of all its assortments. This particular action is mainly least favored because it entails a larger government sector for it to work ideally and this makes policy makers to lean towards an effective tax approach, which generates more revenue (Buena-Bontas & Petre , 2009). On the other hand, Expansionary Fiscal Policy entails an income tax decrease and this particular method is highly preferred since it leads to an ease of its enactment. Transfer payments are the third and final tool, which entails increased payments in unemployment compensation or social security. All these three tools work together as a combination in order to close effectively the recessionary gap and this ultimately results an increase in the rate of unemployment. It is imperative to note that the recession usually takes place because the aggregate production is mainly less and therefore, affects the full employment recession since it is outside the paradigm. This expounds on the major reasons why the federal government takes various actions as it engages in expansionary fiscal policy (Alesina, 2012).
Expansionary Monetary Policy
The Expansionary Monetary Policy is the second policy, which the government utilizes in order to overcome effectively a recession. There are mainly three fundamental tolls, which The Fed (The Federal Reserve Bank) utilizes when it conducts monetary policy and they include open market operations, the discount rate, and the required reserve ratio. These policies mainly utilized by the government through The Fed to expand money supply as well as boost the country’s economic activity. The Fed is able to achieve these noble objectives through ensuring that the interest rates are kept low so that it encourages borrowing by various banks, companies, and individuals. The Fed has the ultimate authority to adjust money supply and interest rates (Amacher & Jennifer, 2012).
In addition, these market changes have significant influences on the overa...