The Two Branches of Macro-Economic Theory
Thinking like a Macro-Economist:
Fiscal and Monetary Policy
Feudalism: You have two cows that your feudal landlord owns. Your landlord takes some of the milk and lets you have the rest.
Communism: You have two cows. Your neighbors help to take care of them and the government tells you how much milk you can produce. You all share the milk.
Dictatorial control: You have two cows. The government takes them both, denies they ever existed, then drafts you into the army. Milk is banned.
Capitalism: You have two cows. You sell one and use the proceeds to buy a bull. Your herd multiplies, you sell them, and then retire.
Macro-economics is perhaps the most divisive area of economics when applied to political decision making, and macro-economists divide themselves into different schools of thought. Two of the biggest camps are the Keynesians and the Monetarists. Keynesians and post-Keynesians follow the theories of John Maynard Keynes, the most-celebrated economist of the 20th century who proposed that government stabilize the economy with the use of fiscal policy. Monetarists, on the other hand, follow the teachings of Friedrich Hayek. For this assignment do some research on the ideas of Keynes and Hayek. Focus on the "big picture" of what their main ideas are and how they have influenced policy makers. Then write a 3 to 4-page paper addressing the following questions:
1.Explicitly define both fiscal and monetary policy.
2. Compare and contrast what policies Keynes and Hayek advocated regarding how the federal government should manage the economy. (Note: There is no need to include biographical information about their lives)
3. The Federal Reserve policy makers use several different tools to influence the money supply and interest rates. The three primary tools used are the operations of the Federal Open Market Committee (FOMC), reserve requirements, and the discount rate. Describe each of these tools regarding how they are used by the Federal Reserve to influence the money supply and interest rates. Include in your answer the difference between expansionary and contractionary monetary policies.
4. Because of the close ties between macro-economics and political decision making it is important to recognize what area of economics, if any, is embedded in the decisions. The following are eleven current or historical actions dealing with government policy. For each scenario determine if it represents fiscal policy, monetary policy, or neither fiscal or monetary policy (not all government decisions are macro-economic in nature). Make sure to explain your answer.
a. First lady Michelle Obama has stressed fighting childhood obesity.
b. Increasing or decreasing the Department of Defense budget.
c. President Obama, through the EPA, and with the agreement of the automobile companies, increased the mileage requirements for automobiles sold in the US.
d. For several years agricultural subsidies were given by the federal government to encourage the production of corn based ethanol fur automobile fuel. These subsidies have recently been eliminated.
e. A job plan to increase employment was recently proposed by President Obama that involved repairing and updating bridges, schools, and roads.
f. Due to the nuclear crisis in Japan, inspections of United States nuclear plants are taking place and additional safety requirements will be written.
g. There has been some speculation that tax deductions, such as the one allowed for interest on home mortgages, will be eliminated or altered.
h. The Federal reserve Board of Governors has recently stated they will maintain interest rates at or near their current low levels until 2014.
i. When President Clinton was in office during the 1990's there was an intentional policy of reducing interest rates, both short and long-term.
j. The Open Market Committee of the Federal Reserve has decided to purchase $10 billion of Treasury securities.
k. The Federal bailouts of General Motors and Chrysler.
Case assignment expectations:
Use information from the modular background readings as well as any good quality resource you can find. Make sure you cite all resources you use and provide a reference list at the end of your paper.
LENGTH: 3-4 typed and double-spaced pages.
In addition to the overall quality, depth, grammar, and organization of the paper, the following will, in particular, be assessed:
1. The level of your understanding of the key concepts that make the two economists both similar and dissimilar.
2. Your ability to apply the theory by analyzing past and current economic actions as given in question 2.
3. Some in-text references to modular background readings (APA formatting not required).