Eco202 Module 1 Case

Touro University International

Todd J. Green

ECO202

Module 1: Case

Dr. Herbert Weinraub

Introduction

In order to explain the most divisive area of economics applied to political decision making, it is essential to dive into the history and ideas of the theories of John Maynard Keynes, and Milton Friedman. How their ideals and policies differ is a good topic for discussion and I will address the differences and similarities in this paper.

1. Explicitly define both fiscal and monetary policy?

Fiscal policy is changes in the taxing and spending of the federal government for purposes of expanding or contracting the level of aggregate demand. In a recession, an expansionary fiscal policy involves lowering taxes and increasing government spending. In an overheated expansion, a contractionary fiscal policy requires higher taxes and reduced spending. According to Keynes, a recession requires deficit spending and an overheated expansion requires a budget surplus.

In a monetary policy, it falls under the control of the Federal Reserve System (our central bank) and is completely discretionary. It is the changes in interest rates and money supply to expand or contract aggregate demand. In a recession, the Fed will lower interest rates and increase the money supply. In an overheated expansion, the Fed will raise interest rates and decrease the money supply.

2. Compare and contrast the way Keynes and Friedman approach the economy. What are their key differences and similarities?

One source of contradiction between the ideas of Keynes and Friedman is in the role of the government. Keynes is concerned with full employment which basically increased the importance of policies and intervention coming from the state. He believed that laissez-faire is flawed and budget deficit accruing from the government, if ever criticized by the principles of classical economics, is justified if it is meant to contribute on job creation. The term famously attached to this claim is pump-priming the economy. The objective of Keynes in raising the extent of government intervention is to safeguard economic structures particularly to optimize the success of individualism.

Friedman, on the other hand, is an advocate of economic freedom and substantially classical economics. He is widely known in several lectures and media appearances emphasizing the individuals right on choosing freely. Using arguments that supported decentralization of power on both political and economic dimensions, he likely challenged the strength of the assertion about the interference on individual consumption and investment. This is because, for him, the role of the government is limited on state protection against foreign threats, maintaining internal peace, creation as well as enforcement of laws of exchange and monetary regulation. Beyond this point, the state intervention is risking individual freedom.

It is important to note that Keynes, like Friedman, is an avid believer of individual freedom and its fundamental function to a satisfying life and also a healthy society. The perceivable doubt is caused by the fact that the former chose to support increase in government intervention. His aim is to improve the tenets of classical economics and contribute on how a free economy should be dealt by political forces. But Friedman, instead of finding weaknesses on a free economy, found ways on how people should continue to fear central control. As an example, he did not showed any concern of increasing the role of government despite rapid globalization.

3. The following are five current or historical government actions dealing with macro-economic policy. For each scenario determine if it represents fiscal or monetary policy, and explain your answer.

a. President Obama has proposed a budget for the next year and the House of Representatives has proposed their own budget that has major differences with the President's.

This proposed budget would fall into the fiscal policy.

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