The central dilemma of macro-economic policy is not the choice between Essay

The central dilemma of macro-economic policy is not the choice between using monetary or fiscal policy but whether to intervene - Essay Example The macro-economic policy is concerned with carrying out certain economic objectives. These objectives aim to eradicate the main macro-economic problems within an economy. These include unemployment, inflation, and negative balance of payments position, a low rate of economic growth and inequitable distribution of wealth (Stan lake, Grant, pp.499, 1967). Macroeconomics conventionally has two governing views on policy; these are interventionist and laissez-faire (Dixon, pp.2, 2000). The paper, before examining these two views in details, will describe monetary and fiscal policy. Monetary and fiscal policies are the two instruments that the government uses to tackle the amount of expenditure floating in the economy. This is because levels of expenditure highly affect the level of inflation, growth, and unemployment. There are varieties of different forms of government macroeconomic policies. However, the best known and the widely used are fiscal policy and monetary policy. These belong to the demand-side economy that is these policies have the aim of affecting the level of aggregate demand in the economy. In a concise form, aggregate demand of a country is as follows: AD= C+I+G-T+(X-M) Where C=Consumption I=Investment G=Government Expenditure T= Taxes X=Exports M=Imports (Universitip, N.p., N.d). Both fiscal and monetary policies are part of the ‘Keynesian’ school of thought that will be discussed in the paper. These two policies can ‘fine-tune’ various economic problems within the economy such as inflation and output growth (Langdana, pp. 10, 2009). Fiscal policy caters to the two components within the economy i.e. Government expenditure and taxes. If there are inflationary pressures within the economy, then the government can increase the level of direct or indirect taxes, or it might also decrease government spending. Both these measures will reduce inflation in the economy. However, during times of recession, the government can incre ase the government spending. This will cause an injection of money into the economy, bringing it out of the recession. In addition, during war years, various countries especially USA saw massive increases in government spending, thus increasing the growth rate. The increase in spending was to due to the funding of the war. The level, the timing, and the composition of taxation and government spending can have an important effect on people’s lives (Stan & Grant, pp. 503, 1967). Monetary Policy also affects the level of aggregate demand. The tools that are used are either the rate of interest or the supply of money. In many countries, it is an acceptable view that the control of the money supply is probably the most significant tool to affect the level of demand in the economy (Stan & Grant, pp. 521, 1967). An increase in the level of interest will mean less spending, because people will tend to save more in such times, because the return on saving will be higher. However, when the interest rate is low, the cost of borrowing will be less, meaning that there will be an increase in borrowing and hence consumption. Therefore, the monetary policy is very important because it affects the level of aggregate demand. One very recent example of the importance of monetary policy is that during the Crash of 2008 in United States, for two years, the interest rate was maintained at 1% (New Work, 2008), which meant that the level of consumption was