Would you use Keynesian Policy?

1. Would you use Keynesian Policy? Explain Keynesian Economics in 10 lines or less.

Keynesian Economics, broadly speaking, is a macroeconomic approach that advocates active government intervention in a country’s monetary policy in order to ensure the best economic outcome. This produces a mixed economy, where both the private sector and the government control market conditions.

In order to ensure economic growth and stability, governments impose policies that could stimulate the economy towards their desired ends. In a recession, stability can be achieved through tax breaks and government spending; in an economic upturn, this can be  done though tax hikes and cutbacks on government spending. Keynes, the theory’s proponent, believes that trends in the macroeconomic level can influence the spending and market behavior of individuals, and that the government plays a crucial part in instigating these trends by adjusting the economy’s general equilibrium.

2. Would you use Supply Side Policy? Explain this Economic Policy in 10 lines or less.

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The supply-side policy holds that influencing the supply of goods and services will lead to economic health. It emphasizes the supply, rather than the demand stimulus towards economic activity. Its conjecture is that if individuals have the means to buy, demand will be created. Supply-side economics thus focuses on policies that raise production capabilities for lowering the cost of products and controlling inflation.

Supply side economists believe that high taxes increases the costs of production, thereby reducing the incentive to work and to invest. As such, they advocate policies that lower taxation rates in order to raise labor outputs and market capitals.

3. Would you use Monetarism? Explain this policy in 10 lines or less.

The doctrine of Monetarism places emphasis on controlling the domestic money supply for promoting growth and maintaining economic stability. Monetarists believe that regulating the national income is the primary means for improving economic activity.

It holds that instability and market changes such as inflation are due to fluctuations in the money supply, specifically, that these changes came as a result of the money supply being larger than the demand. By this assumption, increasing or decreasing the money supply, rather than raising taxes, will keep inflation in check. This is usually done by maintaining price stability and steadily increasing the stock of money in a moderate manner.

4. Would you use a combination of some or all of the above? Explain their main differences in 16 lines.

Among the three macroeconomic policies, I believe a combination of Keynesian and Monetarist approaches will do best in achieving economic growth and stability. According to the theory of Monetarism, inflation is an effect of the supply of money exceeding the demand. As such, regulating market prices is the best way of controlling inflation. But while Keynesian economics focus on the stability of currency, Monetarism focuses on price stability, which is achieved through maintaining money’s supply-demand equilibrium.

Keynesian economics supports government manipulation of market conditions by way of  monetary policies based on real aggregate demand. When there is economic recession and inflation, it advocates higher taxes in order to curb individual spending. But aside from the monetary angle, it also employs fiscal strategies, those that relate to government spending, revenues, and debt.

Supply-side economics is concerned with policies that produce more incentives for work, rather than stimulate demand. The emphasis on the supply factor is the main difference between the Supply-side and Keynesian theories. Proponents of supply-side economics believe that increasing taxes will only cause revenues to fall, therefore, reducing it will do more good by generating economic activity. However, I believe that this will not increase the supply of labor and services substantially. Lower taxes does not necessarily mean that individuals will choose to be more productive. Moreover, huge tax cuts can cause enormous deficits in the federal budget.

5. Given the economic model/theory, you choose to work with, explain your economic strategy for the next four years. In the next four years, I aim to guide the nation towards having a strong and stable financial system. This means that in economic trems, stable prices are maintaned, inflation lessened, and long-term interest rates are moderated. I also aim to keep unemployment to a minimun, or better yet, lower than the current rate of 5.10%. I propose to achieve these things though policies that follow and Monetarist and Keynesian principles.

We can best promote a progressive climate by maintaining an environment of low inflation. An important reason for keeping inflation low is that businesses will be able to foresee substantial future benefits if they are to be willing to bear the long-term risks that are associated with creating new enterprises, and expected low inflation affords them a clearer view of projected benefits.

The Monetarist theory holds that variations in unemployment and inflation rates are caused by changes in the supply of money, and that inflation is a purely monetary phenomenon—this means that if the money supply does not change, the price level remains the same. Therefore, regulating the money supply will ensure a stable economic preformance.

The money supply can be balanced through the buying and selling government bonds and securities. By buying securities, the government increases the money supply, thus lowering interest rates. On the same note, when it sells securites, the money supply becomes tighter.

Using the Keynesian perspective, rising inflation levels can be curbed by imposing higher taxes to lessen demand and stabilize economic performance. This can also reduce the money supply so that interest rates will go up, making it harder for firms and consumers to obtain money, thereby reducing aggregate demand.

Since the current rate of inflation is on the rise, I propose higher interest rates in order to lessen spending. This can also be done by regulating reserve requirements of member banks, affecting interest rates. When banks reserves are lower, there is a limited amount of money to go around so interest rates go up. This usually affects the amount of money banks lend to consumers and firms. When interest rates increase, consumers are less willing to borrow money to spend on goods or services.

I expect the above measures to decrease inflation and increase employment rates, which means that the total market value of all the goods and services will also increase. This translates to a higher GNP. Higher taxes would also lessen the budget deficit, and since the deficit is financed by borrowing, the country’s debt will decrease as well.

As for productivity, I also expect it to increase. The link between costs and  productivity is usually a positive one. Productivity helps offset costs so if inflation is low, it means that productivity is high. If my strategy does not work and my inflation and unemployment goals were not reached, I may opt for deficit spending in order to stabilize the economy. While deficit spending can catalyze negative effects, under certain conditions (such as in a recession), it can help the economy cope. Since the money used to finance deficits usually come from foreign governments and institutions, it would be to the economy’s advantage if  they can be convinced to support my proposal..

Economic indicators, dictate how the policies are implemented. However, globalization can make it harder to determine the extent of economic manipulation that is needed to promote economic growth. A global market changes the dynamics of traditional economic systems, making economic outcomes more difficult to predict. Prices of products and services are now increasingly determined by market factors aside from those within the country. Thus, intervening with the money suppy may not be an accurate response to certain economic situations. Emerging economic trends and indicators should be taken into account regarding government policies and decisions.

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