Table of Contents
1- The Political problems with Fiscal policy
A fiscal policy requires the input of legislatures and policy makers who in many a times put their own interests first (re-election concerns, development of their states, e.t.c.) before the greater good of the fiscal policy to the state. This causes a lot of delays in coming up with a policy to remedy a problem in the economy leading to massive effects such as extreme high prices and inflation rates. Poor timing of projects makes the fiscal policy ineffective since by the time its effects are felt in the economy, the problem it was meant to solve is usually long gone. In addition, policy makers are the ones often responsible for deficits in the economy’s budget. Due to their inefficiency, they fail to recognize the various constraints in the economy when drawing estimates as well as fail to draw a correct preference of the projects to be done.
2- The Obama Stimulus Plan
The package contained a strategy in which the government increased its spending to trigger the development of the economy. Initially, the government adopted a practice where tax rebates were used as a fiscal policy measure to stimulate economic growth and development. Obama saw this as a necessary move since the monetary policy had done what it could but still the economy was not moving as expected. The reasons for this package include; to stimulate economic growth, create employment, instill the confidence required to initiate economic growth, restore some level of trust in the financial sector as well as save the government billions of money.
3- Central Bank Independence
The central bank has absolute independence from political interference. This way, it is able to make policies and implement them in order to fight inflation. It is necessary for the central bank to be independent in order to contain and keep in control the trust and faith of the people as well as the financial markets. This assures them that money value will remain stable. This kills unhealthy speculation and ensures that economic variables such as interest rates and consequently prices in the economy remain stable hence the economy also stabilizes.
4- Modern Monetary Policy
Since 1994, the Fed keeps inflation under control by keenly monitoring the market demand and supply. It uses variations in interest rates to control the level of inflation. This is to avoid the economic recessions that have rocked the country in the past, maintain a good and stable environment in the stock markets as well as keep unemployment rates in check to ensure a stable economy. Interest rates affect the credit conditions which de/motivate investors thus leading to high/low un/employment levels. During recessions, the Fed varies interest rates appropriately until the county’s economy is set on a recovery course.
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5- How to make a Bubble
A bubble is a sharp increase in prices more than can be supported by the available fundamentals due to an increase in demand in the economy followed by a sharp decrease in supply leading to low prices. The economy undergoes a cycle which is characterized by a sharp expansion that is later followed by a contraction. In equities, prices increase rapidly than can be warranted by essential fundamentals in the market followed by a radical fall in prices which triggers massive selloffs. In the security market, it is believed that, when the security prices surge rapidly thus exceeding their value, a bubble bursts if the situation continues and when a freefall is reached in prices. There are usually no returns in the long term for investors in an economy experiencing bubbles.