Monetary Policy, Fiscal Policy, Business Cycles, and Economic Growth - Assignment Example

MONETARY POLICY, FISCAL POLICY, BUSINESS CYCLES, AND ECONOMIC GROWTH MONETARY POLICY, FISCAL POLICY, BUSINESS CYCLES, AND ECONOMIC GROWTH1. Austrians consider monetary disturbances to be the primary source of instability in the economy while Keynesians consider fluctuations in aggregate demand to be the main source of instability in the economy (Hansen, 2013).2. If the rate of the money supply and the velocity of money are kept constant, a higher inflation rate will cause a downward movement along the dynamic aggregate demand curve.3. In the Solow model, a steady state level of capital means that positive net capital investment continues to drive growth at a constant rate.4. In the Solow model, an increase in the investment rate will raise the capital needed to attain a steady state of the output.5. In the Solow model, an increase in savings will cause capital stock to increase.6. a).

If the president of Malawi imposes a 35% tax on foreign direct investment, the amount of foreign direct investment will reduce. Multinational corporations in Malawi will reduce their investments. Foreign Direct Investment stimulates economic growth and reduces the level of poverty. So a decrease in foreign direct investment will increase poverty. Owners of multinational companies in Malawi will receive reduced dividends. Some multinational corporations’ employees in Malawi will either be laid-off or receive lower salaries (Hansen, 2013).6.b).

If the president of Malawi imposes a mandatory minimum wage of $5.00 per hour, workers in multinational companies will receive better pay. Consequently, the level of poverty will reduce in the country. Multinational corporations will incur more cost especially salary expenses. Due to higher costs profits for the companies will reduce thus shareholders will receive lower dividends. Multinational corporations might lessen the number of employees to reduce the salaries expenses they incur (Hansen, 2013).7. Western states like the United States and United Kingdom resort to deficit spending by borrowing money to stimulate economic growth or recovery in times of economic recessions.

The main disadvantage with deficit spending is that it leads to interest rates. High-interest rates reduce the ability to borrow. High-interest rates discourage entrepreneurs to invest. Consequently, low investment rates mean that the production capacity of a country is reduced the general output of the country decreases hence. Reduction in the output of a country reduces the rate of economic growth in a country. Deficit spending means that the government spends more than the private sector. States tend to utilize resources inefficiently.

So these actions might lead to wasted resources. Deficit spending and increased borrowing increases an economy’s inflation rate. Increasing inflation rate reduces the value of a currency and adversely affects its competitiveness with other currencies. Inflation will also lessen the amount of savings (Hansen, 2013).8. Listening to Laurence Kotlikoff of Boston University, I was interested in the argument he brought forward regarding the government’s concealment of its debt obligations. Kotlikoff pointed out that United States federal government resorts to labeling its debts with economic terms to lie to the public that it is in control of its debts but in reality it is not.

Kotlikoff provides an example where his 94-year-old grandma receives treasury bills printed with no actual deposits. He emphasizes that this actions might lead to very high rates of inflation in the future.9. Listening to the podcast, one learns of the government’s techniques in controlling the supply of money in an economy. Kotlikoff clarifies how the government uses the principal plus interest payments made pay retirement benefits to retirees. However, the claims Kotlikoff made on the government’s debt that accumulates to over $200 trillion but reported as $12 million are doubtful.10. The question I would ask Kotlikoff is how he came up with the total debt of the government that is not reported.

Reference listHansen, A. H. (2013). Fiscal Policy & Business Cycles. Routledge.