Week 8 DQ Response Macro
Discussion Question Response

Throughout this course, you have learned about economic models and principles and how they apply to the macroeconomic issues a country faces. Take this time to share what you have learned.

In your initial post, choose one of the six debates of macroeconomic policy discussed in the textbook. Explain why this macroeconomic issue is relevant to you. Support your choice with economic concepts you have learned during the course.

For your response posts, comment on the macroeconomic debates your peers chose. Provide examples from current economic news about the macroeconomic policy debate, and comment on the nature and tenor of the discourse surrounding the different debates.

1. Richard Warren – I’ve learned about economic models and principles, as well as how they apply to the macroeconomic challenges that countries face based on human behavior assumptions, throughout this course. Macroeconomics is a discipline of economics that advises us on a country’s overall economic health. I’ve learned that macroeconomics is primarily concerned with issues like national output (as measured by GDP), unemployment, and inflation. Characteristics such as a country’s quality of life, low unemployment, and low inflation determine its macroeconomic well-being. These features are aided and promoted by macroeconomic policy. These policies include monetary policy, which affects bank lending and interest rates, and fiscal policy, which affects government spending and taxation.

The six macroeconomic policy debates are something I only recently became aware of. The debate I chose from the six macroeconomic policy debates is “Should the government fight recessions with expenditure increases rather than tax cuts?” One of the main causes of a declining economy during a recession is businesses that are unable to market their products or services. This leads to a decrease in output and employment, both of which have an influence on the government. Lowering interest rates, which expands the money supply, would be one of the first steps taken by the government in this circumstance. This is done to assist firms in expanding or improving their operations, resulting in the creation of additional jobs.

The government will also create initiatives that will need spending in this situation. This will be done by the government in order to create an environment that encourages increased spending, which will help to stimulate the economy. Some argue that choosing this path rather than simply lowering taxes will help the economy. One argument for this is that cutting taxes rather than creating a stimulus program is preferable.

Tax cuts can increase aggregate supply while also increasing aggregate demand. Employees keep a higher part of their wages when the government reduces marginal tax rates. As a result, both the unemployed and the employed are more inclined to work longer hours. Higher aggregate supply, along with higher aggregate demand, indicates that goods and service output can expand without rising inflation rates (Mankiw 2021).

It’s difficult to say whether tax cuts or spending increases are the better options. As the textbook implies, you’re only able to make one try at an arrangement. It’s impossible to compare two different economic recessions because they happened at different times in history and were influenced by different factors. In the COVID-19-induced recession, what worked in 2009 may not be as successful today.

Personally, I found this to be a fascinating discussion. Tax cuts, I used to believe, were always preferable to more government spending. I had no clue that spending by the government could benefit us more than tax cuts. I had no issue paying bills because my company was considered essential, but the stimulus money did help me pay off some debt and was a textbook example of government spending.

Everything in the economy and macroeconomics looks to be interconnected, which I find intriguing. It’s a fine balancing act that relies heavily on cause and effect. The economy as a whole suffers when one part is affected. When one of these areas becomes unbalanced, it has the potential to throw the entire economy into disarray and, in the worst-case scenario, cause a recession.

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2. Kevin Reed – Should monetary policy be made by rule or discretion?

Monetary policies in the U. S. are set by the Federal Open Market Committee (FOMC). Members meet every six weeks to consider changes in interest rates and may meet at an unscheduled time if there are changes in the state of the economy. The policies are essential to reach their goals of strong economic growth, full employment, and stability. In making these decisions, should the FOMC be restrained by strict rules, or should they be allowed flexibility to respond quickly to economic fluctuations with discretionary action? Currently, they operate with almost complete discretion on how to conduct monetary policy (Mankiw, 2021).

This issue is relevant to me because like all citizens, we need those in charge of making decisions that impact the economy to be as efficient as possible to ensure we have the best economic opportunities.

If rule-based monetary policies were implemented, it would create predictability in how the Fed will react to certain economic conditions; however, it would make it difficult to respond to fluctuations in the economy (Mankiw, 2021). For rule-based policies to be effective, specific targets for key economic variables would be needed; as well as an added provision to the policy, which would kick in if a target was exceeded. For example, if the inflation rate target is 2%, and the rate exceeds 2%; the provision might call for immediate restrictions on the money supply until the rate aligns with the target rate. The economy can be extremely complex due to the many factors that cause fluctuation; therefore, monetary policy rules cannot encompass the total complexity of the economy. It is impossible to make a rule for every possible economic situation and although discretionary monetary policy is not perfect; the one significant advantage it has, is that it has flexibility.

According to Mankiw (2021), “critics of rules for monetary policy argue that discretionary policy is more flexible in responding to changing economic circumstances”. Therefore, it is my opinion that monetary policy must continue to be discretionary to ensure room for flexibility to be able to quickly adjust to any economic fluctuations.

References:

Mankiw, N. G. (2021). Principles of economics (9th ed.). Cengage Learning.

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