Topic 1: Fiscal Policy
Fiscal policy refers to the changes in government’s choices regarding the overall level of government spending and taxes to influence the behavior of the economy. Fiscal policy can expand or contract aggregate demand. The government sometimes uses the fiscal policy instruments in an attempt to stabilize the economy. Under a recession, an expansionary fiscal policy is adopted, which involves lowering taxes and/or increasing government spending. In an overheated expansion with an inflationary pressure, a contractionary fiscal policy is utilized, which requires higher taxes and/or reduced government spending. Economists and policymakers disagree about how active the government should be in these fiscal policy efforts.
Based on the above summary and the detailed descriptions of the fiscal policy issues in the textbook (Chapter 33) discuss the following questions:
- What are the expansionary and contractionary fiscal policies? What are their policy instruments? How are they used to deal with the inflationary gap and recessionary gap? Which do you think is more appropriate today?
- Should the government balance its budget? If you think it should, what steps do you suggest that it take to balance its budget?
- What is the relationship between budget deficits and national (public) debt? Why the U.S. national debt has been increasing for decades?
- Should the tax laws be reformed to encourage saving? Do you think consumption tax is better than income tax?
Topic 2: Monetary Policy
The Federal Reserve is responsible for regulating the U.S. monetary system and setting monetary policy. Monetary policy refers to what the Federal Reserve does to influence the amount of money and credit in the U.S. economy. Policy instruments that affect the quantity of money and credit affect interest rates (the cost of credit) and the performance of the U.S. economy.
The Federal Reserve’s three instruments of monetary policy are open market operations, the discount rate and reserve requirements. The Fed controls the money supply primarily through open-market operations.
Board of Governors of the Federal Reserve System. (n.d.). Retrieved from http://www.federalreserve.gov/
Based on the above summary and the detailed descriptions of monetary policy issues in the textbook (Chapter 34 and Chapter 36) discuss the following questions.
- What are the expansionary monetary policy and contractionary monetary policy? What are their policy instruments? How are they used to deal with the inflationary gap and recessionary gap? Which do you think is more appropriate today?
- If the Fed wants to increase aggregate demand, it can increase the money supply. If it does this, what happens to the interest rate and rate of inflation? Why might the Fed choose not to respond in this way?
- Should monetary policy be made by rule rather than by discretion? Why?
- The only thing backing up a nation’s currency (fiat money) in the modern world is faith in the government issuing it. If this is so, what should governments do to maintain a stable currency? How can the Central Bank (the Federal Reserve) build trust in the U.S. currency? What actions would undermine a currency?
The changes in the natures and forms of competitions, macroeconomic conditions, fiscal policy and monetary policy tools (instruments) affect the performance of companies. With a Global Fortune 500 Company you selected for your research in your mind, utilize (demonstrate) your critical thinking skills in your discussion and analysis of the following questions.
- Competition is generally considered to be a source of growth for companies as well as for the general economy. Studies confirm that competition leads to more efficient resource use. Yet, competitive forces also result in firms being driven out of the market. Moreover, firms compete through innovations and introducing new products to the market. Some of these products will be successful and others will end up failures.
Why is competition important for efficient use of resources? What can the company you researched do to compete effectively? How may the company avoid business failure competitions induce?
What determines whether the new products are successful or failures? How important is innovation and product differentiation as the source of growth for the company of your research?
- Business cycles lead to fluctuations of macroeconomic indicators, and hence they have impacts on the performance of firms. Suppose the economy is under recessionary pressure. The uncertainty about the future causes households to increase their saving and reduce their consumption. In another situation, suppose the household saves little and spends most of its income on current consumption.
How does a company prepare to weather the ups and downs of the business cycles? How will the situations that influence household spending behavior affect the company you selected for research? How can the company plan to deal with the economic decline and decrease in household spending to be profitable on a sustainable basis?
- Fiscal policy deals with the government’s spending and taxation practices. The changes in fiscal policy affect households and firms (companies) in the economy. Monetary Policy refers to the actions of the Federal Reserve to control (regulate) money supply to influence the rate of interests in the economy. The change in the rate of interests affects companies and households. Suppose the Federal Reserve increased the money supply to reduce the rate of interest.
How does this affect the company you selected for your research? How can the company prepare itself to deal with the changes in fiscal policy and monetary policy? What actions do you suggest for the firm to undertake to ensure success on a sustainable basis during the changes in macroeconomic environments pertaining to fiscal policy and monetary policy?