With monetary policy increasingly constrained, fiscal policy has taken on a critical role in macroeconomic stabilization during the crisis, delivering unprecedented stimulus in 2020 in the form of cash transfers and income support to households and firms.”Explain how monetary and fiscal policy is implemented and how they can be used to influence GDP and the price level.

Description

It’s probably fair to say that for many years fiscal policy has been the poor relation to monetary policy in macroeconomic policy making circles. Now it is back in vogue. In their recent assessment of the economic impact of the pandemic, the World Bank (p56, 2021) concluded, for advanced economies such as the United Kingdom (UK), that,

“With monetary policy increasingly constrained, fiscal policy has taken on a critical role in macroeconomic stabilization during the crisis, delivering unprecedented stimulus in 2020 in the form of cash transfers and income support to households and firms.”

Explain how monetary and fiscal policy is implemented and how they can be used to influence GDP and the price level.

The quotation above highlights the unprecedented use that has been made of fiscal policy in countries such as the UK during the crisis. Briefly consider whether fiscal policy will remain the key policy instrument in these sorts of countries in the near future.

Guidance

This assignment has two elements.

The first part gives you the opportunity to display your understanding of how the main instruments of macroeconomic policy, namely monetary and fiscal policy, are implemented and take effect. Your explanation should make use of the aggregate demand and aggregate supply framework. In the case of monetary policy you might explore the link between the money market, economic output and prices. In the case of fiscal policy, you might want to contrast it with monetary policy, and to explore the significance of the distinction between discretionary and non-discretionary fiscal policy.

This should account for roughly 4/5ths of the words.

The second part of the explanation allows you to use your knowledge of monetary and fiscal policy to explore the options available to macroeconomic policy makers in countries such as the UK now and in the near future. How should the levers of macroeconomic policy be used to help the UK economy in these difficult times? In what way is monetary policy constrained? Might that constraint be relaxed? In the case of fiscal policy, how should it be altered to support economic recovery?

This should take up the remaining 1/5th of the words.

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