Monetary policy is enacted by a central bank that controls money supply that is circulating in the economy. This money supply influences inflation and interest rates that determine consumption level, employment rate and cost of debt. Expansionary monetary policy involves in buying treasury notes and declining interest rates on loans of central banks. These actions help in making the money supply to increase and making interest rates lower. This policy also makes consumption to be more attractive corresponding to savings.
That's because legislators knew they must stop the worst recession since the Great Depression. Fiscal Policy vs. Monetary Policy Monetary policy is when a nation's central bank changes the money supply. It increases it with expansionary monetary policy and decreases it with contractionary monetary policy. It has many tools it can use, but it primarily relies on raising or lowering the fed funds rate. This benchmark rates then guides all other interest rates.
This is part of the classical theory of full employment, according to which competitive forces and flexible wages and prices ensure that full employment equilibrium is achieved with no overproduction. The main limitations of the simple Keynesian model are that it fails to pay adequate attention to the effects of changes in wages and prices, and ignores the monetary sector of the
Keynes contrasted his approach to the aggregate supply, focused 'classical' economics that preceded his book. The interpretations of Keynes that followed are contentious and several schools of economic thought claim his legacy. Keynesian economists often argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, in particular, monetary policy actions by the central bank and fiscal policy actions by the government, in order to stabilize output over the business cycle.  Keynesian economics advocates a mixed economy – predominantly private sector, but with a role for government intervention during recessions. Keynesian economics served as the standard economic model in the developed nations during the later part of the Great Depression, World War II, and the post-war economic expansion
Keynes main theme was that contemporary capitalist economies don’t always work at their top efficiency he also believed that federal deficits of the 1930s, which was just over $3.5 billion per year, were too small to support the United States economy . The Keynes theory allowed for a greater government involvement in the nation’s economy . In 1965 the government carried out 2 stages in income-tax cuts which allowed the consumers to spend and corporations to invest and the Keynes theory used 3 tools to do this: credit policy, tax policy and budget policy . Keynes believed that the primal goal for an economy was full employment of materials, people and machines . Keynes theory fell under the study of “macroeconomics” .
The impact of taxes and public spending on economic growth has become a subject of much discussion and debate among economists. This is partly because there are many theories regarding what propels and facilitates economic growth: while some favour the Keynesian demand side factors, others Neo-classical supply side factors, while yet others consider a mixture of the two or another theory altogether. However, the world economy is sufficiently large and complex enough so that any theory can find some support in the data. By implementing changes in tax rates and public spending, the government can influence the economy, through what is popularly known as fiscal policy. There are strong proponents as well as opponents for cutting taxes and public spending.
3.0 IMPLICATIONS OF GOVERNMENT SPENDING Government spending or also known as government expenditure has both positive and negative implications. There are some arguments related to the relationship between government spending and economic growth. Economic growth consist of Gross Domestic Product (GDP), interest rates, supply and demand of economy and inflation. According to Hasnul, A.G. (2015), Wagner’s law suggested that government expenditure increase because of the economic growth. According Hasnul, A.G. (2015) , in contrast, Keynesian hypothesis state that expansion of government expenditure accelerates economic growth.
1929 economic crisis, which is generally called as Great Depression, had upset the balance of world economic order. Until the depression, classical liberal economic theories were dominating World order. Classical economics is a supply oriented theory, claiming that whatever the level of supply, it is going to create its own demand in the market. If the free market determines the levels of prices, economy will always be in the situation of full employment. Accordingly, states should never interfere in the market.
His book “General Theory” was written during the period of great depression and was mainly the product of his prolonged study of unemployment in Britain. The post World War II era witnessed abrupt changes in the area of economic development. Basis of state intervention in the economy Keynes pointed out that the state intervention was necessary to deal with the ups and downs in the economy which we called trade cycles or business cycles. He believed that the only way to put demand for goods and services up and running was with the help of government spending so as to put money into the private sectors. The US president Franklin Roosevelt gave this a try in his massive public works
Economics Assignment Introduction This paper is about theories of instability with a critical discussion of the ideas that are set forth. Instability lies at the core of economics, therefore most economic thinkers, throughout time, have at some point – in one way or the other - touched upon the topic. Marxian theories of instability are, among a few others, considered to be the most influential. Therefore I see Marx as a good starting point for examining the factors behind the booms and busts in the capitalist market economy. To analyze and add to the views presented by Marx, I will present the theories developed by Schumpeter, who’s thoughts are, to some extend, building on Marx.