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Why The Monetary And Fiscal Policymakers Should Not Try To Stabilize The Economy

756 Words4 Pages

Assignment III

Monetary and fiscal policymakers should not try to stabilize the economy. It is an ideal thought of altering the economy with policies, however, the effectiveness is not as great as one would automatically assume. An alteration in the monetary or fiscal policy are not instant and take time to become effective. Policymakers would have to plan on how a policy change would affect the future economy. A change in the monetary policy would directly alter the interest rate of goods and services. Over time, the change in interest rates would affect aggregate demand and spending, primarily in business and real estate investments. Considering most business and real estate decisions are arranged in advance, the change in interest rates in monetary policies are less effective immediately. According to previous studies, it usually takes until six months after a policy is altered for it to become effective. A change in fiscal policy is an even longer process. It is a political process that can take years to complete changes to policies on spending and taxes. The bill is first put …show more content…

Each year, the central bank chooses an inflation rate usually between one and three percent. The central bank also chooses a rate for sudden fluctuations in the economy. I think everyone in the economy would love zero inflation, however, some inflation is necessary. As inflation decreases, unemployment increases, forcing the economic output to decrease. When an individual loses their job, they also lose their job skills, or at least reduces them. Over time, the value of the worker decreases. The benefit of zero inflation compared to a small-to-moderate inflation is not much better especially when you consider the drastic costs. The estimated costs of reducing inflation one percent will result in a five percent decrease in one’s year’s output. Inflation from four to zero percent will cost twenty percent of someone’s yearly

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