ECO202 CA Essay Example | Topics and Well Written Essays - 750 words

ECO202 CA - Essay Example It is during periods of recession, however, that terms fiscal and monetary policies can best be appreciated. Fiscal policy is the policy advocated by John Maynard Keynes while monetary policy, on the other hand, is advocated by Milton Friedman. According to basic economics, the obvious traceable cause of a recession is a poor level in aggregate demand. When we say aggregate demand, it is the total demand for all goods and services produced in a particular period. Of course needless to say, when no one is buying anything, who would want to produce more? What reason there is for an employer to hire working men to manufacture his product when no one after all is demanding for it? It will only bring him a loss instead of income. According to Keynes, during periods of recession, the government must enter the game and play a very critical role --- to stimulate overall aggregate demand (which is a deemed solution to the problem). The government must cut taxes and spend more on worthy projec ts to support the public needs and the business sector. When taxes are low and more government projects are in harmony with business’ goals and visions, more investors are being lured to invest, thereby solving unemployment problem. Now assuming the opposite is happening as in the case of an overheated expansion, the government still has a role to play. It has to tighten taxes and spend less to counter balance the effects of economic boom. Whether the government cut or tighten taxes, spend more or less, these actions simply refer to the government’s fiscal policy. Monetary policy on the other hand is another perceived solution to the problem of recession. As the word suggests, monetary policy has to do with interest rates and money --- production, supply and circulation of money. According to Milton Friedman, the proponent of monetary policy, the supply and circulation of money in the market has a greater impact on the economy more than anything else. During a period o f high unemployment the government must reduce the interest rate and increase the money supply. Likewise, when unemployment is low, the government has to raise interest rates and decrease the money in circulation. As compared to fiscal policy which is more of a function of the legislative branch of the government, take note that the implementation of monetary policies is vested in the hands of the Central Bank. They are independently implemented apart from fiscal policies of the government. 2. Compare and contrast the way Keynes and Friedman approach the economy. What are their key differences and similarities? John Maynard Keynes is a British economist who believes that the key to achieving a balanced economy, especially during a period of recession and economic downturn, is an effective government intervention that will cut on taxes and implement an expansionary fiscal policy (meaning, more government spending on worthy projects) or contractionary fiscal policy (increase in taxes and lesser government spending) as the case may be. Keynes’ economic framework focuses more on demand and spending. Absurd as it may sound but Keynes believed that spending, and not hoarding, helps the economy at large. The reason is that the spending of one person forms part of the income of another person, and when that person further spends his income, it forms part of the