1. Explicitly define both fiscal and monetary policy.
2. Compare and contrast the way Keynes and Friedman approach the economy. What are their key differences and similarities? 3. The following are five current or historical government actions dealing with macro-economic policy. For each scenario determine if it represents fiscal policy or monetary policy, and explain your answer. a. President Obama has proposed a budget for the next year and the House of Representatives has proposed their own budget that has major differences with the President's. b. When President Clinton was in office during the 1990's there was an intentional policy of reducing interest rates, both short and long-term. c. Beginning with the Bush administration and continuing with the Obama administration there was a bailout of the financial system. d. To avoid a stalemate with Congress that could have prevented any new legislation from being passed, the President and Congress, in December 2010, reached an agreement on extending the Bush era tax cuts for an additional two years. e. Paul Volker was chairman of the Federal Reserve system in the late 1970's and through most of the 1980's. In the late 1970's and into the early 80's the United States was experiencing high inflation, reaching double digits of 10% and more. To reduce the inflation rate Mr. Volker dramatically increa sed interest rates to slow down the economy, and this plunged the US into a steep recession. 4. You have learned that Keynes and Friedman sharply differed on some basic ideas of how the Federal government should conduct economic policy. Which of the two economists do you agree with more, and explain why.
May 25, 2011
Fiscal and Monetary Policy
Market economies fluctuate periodically in their level of activity. A recession is one side of the fluctuation, while an expansion is on the other side. According to The Essential Principles of Economics, a recession typically lasts six to...