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Fiscal and monetary policy

1. Explicitly define both fiscal and monetary policy.

2. The following are five current or historical government actions dealing with macro-economic policy. For each scenario determine if it represents fiscal policy or monetary policy, and explain your answer.

a. President Obama has proposed a budget for the next year and the House of Representatives has proposed their own budget that has major differences with the President's.

b. To avoid a stalemate with Congress that could have prevented any new legislation from being passed, the President and Congress, in December 2010, reached an agreement on extending the Bush era tax cuts for an additional two years.

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3. You have learned that Keynes and Friedman sharply differed on some basic ideas of how the Federal government should conduct economic policy. Which of the two economists do you agree with more, and explain

Solution Preview

1. Explicitly define both fiscal and monetary policy.
Fiscal policy is the manner in which the government changes its level of spending so as to influence the country's economy. Fiscal policy is based on the assumption that the government through adjustments in its spending can affect macroeconomic productivity levels by increasing or decreasing tax levels or government spending.
Monetary policy is one in which the central bank of a nation affects the money supply of that country to achieve economic objectives. Specifically the monetary policy refers to changes in the base rate of interest to affect the rate of growth, aggregate demand, and inflation.
2. The following are five current or historical government actions dealing with macro-economic policy. For each scenario determine if it represents ...

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This answer offers cogent arguments relating to Fiscal and monetary policy

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