Principles of Macroeconomics, Coursework Example

Clearly differentiate between Fiscal and Monetary Policy.  Given the current state of the economy, which do you think is more effective? Why?

Within the context of economics, fiscal policy is the use of government spending and revenue collection in order to influence the economy.  It is a macroeconomic policy tool that regulates the total level of economic activity within a nation.

Monetary  policy is the process by which the government or central bank or monetary  authority controls :   [1] the supply of money [2] the availability of money and [3].  The rate of interest applicable to the cost of money.

Given the current state of the US economy I would opt for fiscal policy being the more important given the high level of external expenditures taking place.

Clearly differentiate between that of a progressive, proportional, regressive and flat taxation system. In your opinion which is the most equitable tax system and why?

A progressive tax system is one whereby those who earn higher incomes pay a higher percentage of their incomes than those with lower incomes  e.g.  A graduated tax.  A proportional tax system relates to that of a  system for all levels of income are taxed at the same rate.  A regressive tax system is one that provides the average tax rate that decreases with increasing individual’s income brackets.  The flat tax system has a fixed rate of tax regardless of the level of income.

I personally support the existing US system of progressive taxation as it is both equitable and socially responsible.  Those that are able to earn higher incomes should help with the support of the poor and underprivileged classes of society.

What are the monetary economic goals of the United States? Explain the Employment Act of 1946. What are the functions of the Council of Economic Advisors? Who do they report to?  In your opinion how effective have they been?

The Federal Reserve act sets out the nation’s monthly policies and objectives.  Essentially, the promotion of maximizing employment, stable prices, and moderate long-term interest rates.  The employment act of 1946 was passed shortly after the economic depression in the 1930s.  This was a revolution in macro economic theory and was aimed at pursuing a policy of compensatory finance to prevent the boom and bust periods in the economy.  The bill was not without its controversy, as it was considered alien to  American society.  Hence,  the goal was to maintain high levels of  employment and price stability.  The two are in conflict with one another owing to the concept of demand -pull inflation.

” The Council of economic advisers consists of a group of three economists who advise  the president on economic policy.  They are part of the Executive office of the President  of the USA.  ” (answers.com). They prepare the annual economic report of the President. The President’s  counsel was strongly criticized last year for failing to see employment reaching 10%. The chair woman of the Council disputed this  stating it had been very accurate in the GDP forecast.

Explain the difference between an “expansionary fiscal policy” and a “contradictory fiscal policy”?  What do we have now?

An expansionary fiscal policy is that which increases an expenditure in government purchases, a decrease in  taxes or an increase in transfer payments to correct a business cycle problem.  The ultimate aim is to close a recessionary gap and thus stimulate the economy and decrease the unemployment rate.

A contradictory fiscal policy is one which illustrates a decreasing government purchases, increases taxation or used to correct a business cycle expansion.  The main policy is to close an inflationary gap, restructure the economy and decrease the inflation rate.

Currently have an expansionary fiscal policy.

Clearly differentiate between “transaction demand for money”, “precautionary demand for money” and “speculative demand for money”. What are the primary functions of money?

The transaction demand for money is positively related to income and negatively related to the interest rate.  It is the need to accommodate the unexpected cash transaction.  A precautionary demand for money relates to “the need to meet unexpected or extraordinary contingencies with a buffer stock of cash.” (BizTerms) The speculated demand for money is the need for cash to take advantage of investment opportunities that arise.  The primary functions of money are the medium of exchange and common nature.  It provides an exchange of value, i.e. exchange of product for money.  It provides a store of value.  It is a commodity that you can store until you wish to exchange it.  It is a standard value; enabling valuation of assets in terms of a monetary value.

In your own words explain the “powers of the Federal Reserve”. Which is the least effective, the most effective and the most frequently used power? What is the primary function of the FOMC (Federal Open Market Committee)?  When is their next meeting?

The Federal Reserve is the nation’s central bank.  As such it is the most powerful economic institution and the lender of last resort.  Congress has the important responsibility of overseeing the Federal Reserve and as such the responsibility for monitoring policy.  The Federal Reserve is responsible for the management of total spending, aggregate demand and control of inflation.  The monetary policies of the Federal Reserve influence interest rates, foreign exchange rates and other foreign market prices.  They are the lender of last resort for the entire financial system.  Of  the four most important functions, the Federal Reserve is mostly used for control of interest rates and the lender of last resort.  The control of inflation and management of aggregate demand of better control by monetary policy.

The Federal open market committee meets eight times the year in order to set key interest rates.  e.g. discount rates, whether to increase or decrease monetary supply.    Equally, to tighten the march is supplying all decrease the amounts available in the system.  It is not possible to determine the date of the next meeting as these are secretive and cause much speculation on Wall Street.

Explain the concept that the United States has a “dual banking system”? What commodity (gold, silver, platinum.) backs up the US dollar.  Explain the concept of legal tender?

The system of banking that operates in the United States relates to the banks being chartered and supervised at different levels.  With the dual system, the national banks are charted and as such regulated under federal rules and standards.  This includes supervision by a state supervisor.  The system allows for the coexistence of two different regulatory structures for both state and national banks. The American dollar is backed by the full faith and credit of the United States. As such no longer backed by a single commodity like gold or platinum.  Legal tender is a country’s currency that is except as payment for debts.

What are the primary functions of the Federal Reserve?  Who is the Chairman of the Federal Reserve (FED)? When does his term end? Can he be reappointed?  Who was the previous Chairman of the Fed?

The Federal Reserve is responsible for the management of total spending, aggregate demand and control of inflation.  The monetary policies of the Federal Reserve influence interest rates, foreign exchange rates and other foreign market prices. They are the lender of last resort for the entire financial system.  The Current Chairman and previous Chairman of the Reserve are:

• Alan Greenspan (August 11, 1987 – January 31, 2006)
• Ben S. Bernanke (February 1, 2006 – Date)

” The Federal Reserve System is supervised by the Board of Governors.” (Federal Reserve Bank of New York). It was President Bush that appointed Bernanke for a 14-year term.

Explain how commercial banks create “money”. How does the money supply affect interest rates? On the federal side who audits commercial banks and why?

Commercial banks create credit or money and make it possible for deposit to be made through loans.  By the granting of loans to customers, commercial banks increase the purchasing power of the borrower; this increases the value of money circulating.  Owing to the fact that money is used on virtually all transactions it impacts economic activity and an increase in supply lowers interest rates, which in turn spurs investment.  On the opposite side.  When the supply of money falls, the rate of growth declines and either reduced inflation or falling prices result.  All commercial banks receive independent external audit by appointed CPA firms.  The Board of Governors of the Federal Reserve banks arrange external audits of the banks.

Clearly differentiate between the “discount rate”, “Federal Funds Rate” and “Prime Rate”. Whose responsibility is it to set these interest rates? What are the actual rates today?

The discount rate refers to borrowing from the Fed.  This is fairly limited.  It relates to the interest rate that an eligible depositary institution is charged for short-term funds from the central reserve Bank.  The federal funds rate is the rate at which a depositary institution. lends immediately available funds [i.e. balances at the Federal Reserve.]  to another depositor institution overnight.  Prime rate is the interest rate that commercial banks provided the most creditworthy customers, normally large corporations.  This is largely determined by the federal funds rate.  The Federal Reserve is responsible for setting interest rates.  FOMC — Federal Open Markets Committee.

Works Cited

answers.com. Council of Economic Advisers. 19 5 2010. 19 5 2010 <http://www.answers.com/topic/council-of-economic-advisers>.

BizTerms. Precautionary demand (for money). 18 5 2010. 18 5 2010 <http://www.bizterms.net/term/Precautionary-demand-for-money.html>.

Federal Reserve Bank of New York. Board of the Governors of the Federal Reserve System. 11 2008. 19 5 2010 <http://www.newyorkfed.org/aboutthefed/fedpoint/fed46.html>.