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Macroeconomics: Fiscal Policy, Monetary Policy, Debt and Deficit Assignment Help

Complete the questions below that are based on your chapter readings. 

1. a. What is fiscal policy? What kind of fiscal policy is needed to reduce unemployment problem? 

b. What is monetary policy? What kind of monetary policy is needed to fight inflation problem?

2. Write an essay on debt and deficit and include answers to the following in your essay:

What is budget deficit and how is it related to Government debt? 

What is cyclical adjustment to deficit and how does it help to understand the stance of fiscal policy? 

What is crowding out? How does budget deficit crowd out investment? 

Why is a high level of government debt is a matter of concern ?

Answer 1

Part a: Fiscal policy

Fiscal policy is the method that is used by any government to adjust the amount it spends, along with the tax rates, with the intention to monitor and shape the economy of the country. The fiscal policy helps to direct the economic goals of a nation. It is also known as the Keynesian theory, as it was modelled after John Maynard Keynes, a British economist.

Unemployment can be decreased if there is a surge in the rate of economic growth along with the aggregate demand. Thus, an expansionary fiscal policy must be deployed by the government. In this case, the government will be required to cut down taxes and increase its own spending (Afonso and Sousa, 2012). The disposable income will increase as the taxes decrease, which will in turn help accelerate consumption, resulting in a higher aggregate demand and consequently, a growth in the real GDP.

Part b: Monetary policy

Monetary policy is that macroeconomic policy that is usually outlined by the central bank. The supply and management of money, along with interest rates are involved in this policy (The Economic Times, 2019). It is among one of the demand side economic policies that a government uses to deal with national issues on a macroeconomic level, such as growth, liquidity, inflation and consumption.

In order to fight inflation, a contractionary monetary policy can be deployed. The goal of this policy is to reduce the supply of money within an economy, and this is achieved by increasing the rates of interest and reducing the bond prices. This consequently helps to put a leash on the spending capacity, as the amount of money available for circulation reduces, which encourages others to save instead of splurging. This reduction in the overall spending halts the economic growth (Mallick and Sousa, 2012), which in turn affects the inflation rate and brings it down.

Answer 2: Debt and deficit

A budget deficit is when the expenses or the spending for an individual, business, or a government, is more than available funds or revenue. The aggregate number of deficits that are accumulated over time results in the formation of a debt. The budget deficit indicates the financial health of any country, and the term is usually utilized by the government to refer to the amount it spends. Government debt is when these government deficits keep piling and are accrued together.

A cyclical adjustment to deficit is when the slowing economy of a company causes budget deficit rather than the fiscal policies such as low tax rates and increased discretionary spending. The budget deficit is usually attributed to the government's implementation of an expansionary fiscal policy. If the resulting budget of the fiscal policy is balanced cyclically, it implies that the policy is neutral, and the deficit has been caused by the slow economy and not the government's chosen fiscal policy (Luechinger and Schaltegger, 2013).

Crowding out is when there is a reduction in the investments by businesses, along with a decrease in the personal consumption of goods or services due to the increase in government spending. This usually occurs due to the ability of the deficit financing to consume the available finances and make interest rates shoot up. In other words, if borrowing is the method that finances budget deficits, there is an increase in the rates of interests in order to allow the capital markets to reach an equilibrium (Afonso and Sousa, 2012). These high rates consequently lead to decreased investment levels, thereby contributing to a crowding out effect.

A high level of government debt is indeed a matter of concern, as the crowding out effect itself suggests that the risk of government default is directly proportional to the amount of accumulated national debt. Thus, the cost of fresh borrowing is also higher, which will consequently increase the expenses of borrowing in the private sector as well (Skidelsky, 2016). Moreover, in case the government decides to tackle the debt by printing more money, the inflation rates could go out of hand, leading to economic instability.

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