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Chapter 27: Problem 1

Which can be changed more quickly: monetary policy or fiscal policy? Briefly explain.

Short Answer

Expert verified
Monetary policy can be changed more quickly than fiscal policy, mainly because it is directly controlled by the central bank, whereas changes to fiscal policy necessitate legislative approval and potentially lengthy budgetary allocations.

Step by step solution

01

Define Monetary and Fiscal Policy

Monetary policy involves changing the interest rate and influencing the money supply. It is typically administered by a country's central bank. Fiscal policy, on the other hand, involves the government adjusting its spending levels and tax rates to monitor and influence a nation’s economy.
02

Consider the Process to Change Monetary Policy

To change monetary policy, the central bank can directly change interest rates or adjust the money supply, which typically involves buying or selling government bonds. This can be done relatively quickly, as it does not require legislative approval. Changes can often be implemented within the time frame of one meeting of the monetary policy committee.
03

Consider the Process to Change Fiscal Policy

Fiscal policy, on the other hand, involves changing government spending or taxation levels. This typically requires the approval of legislation, which can be a lengthy process due to the need for discussions, debates, and a voting process within the relevant government legislative bodies.
04

Compare the Two Policies

Comparing the two policies, it is clear that monetary policy can generally be changed more quickly due to its direct implementation by a central bank, whereas changing fiscal policy is a lengthier process due to the need for legislative approval and allocation of budget.

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Most popular questions from this chapter

In \(2017,\) an article in the Wall Street Journal discussed a report by the World Bank. According to the report, "More than half of emerging economies saw their debt-to-GDP ratios rise 10 percentage points and in a third, budget balances worsened by more than five percentage points." a. What does the report mean by "budget balances"? b. Is there a connection between these countries experiencing worsening budget balances while also experiencing increasing debt-to-GDP ratios? Briefly explain.

An article in the Wall Street Journal stated that "Japan's cabinet approved a government stimulus package that includes \(¥ 7.5\) trillion (\$73 billion) in new spending, in the latest effort by Prime Minister Shinzo Abe to jump-start the nation's sluggish economy." a. Draw an aggregate demand and aggregate supply graph that shows where the Japanese government expects the economy to be without the stimulus package. Briefly explain what you graph shows. b. In the same graph, show the effect of the stimulus package on the economy. Briefly explain what your graphs shows.

Suppose that real GDP is currently \(\$ 17.1\) trillion, potential GDP is \(\$ 17.4\) trillion, the government purchases multiplier is \(2,\) and the tax multiplier is -1.6 . a. Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP? b. Holding other factors constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential GDP? c. Construct an example of a combination of increased government spending and tax cuts that will bring the economy to equilibrium at potential GDP.

Briefly explain whether you agree with the following statements: "An expansionary fiscal policy involves an increase in government purchases or an increase in taxes. A contractionary fiscal policy involves a decrease in government purchases or a decrease in taxes."

Use a dynamic aggregate demand and aggregate supply graph to illustrate the change in macroeconomic equilibrium from 2021 to 2022 , assuming that the economy experiences deflation during 2022. In order for deflation to take place in 2022 , does the economy also have to be experiencing a recession? Briefly explain.
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