Government Discretionary and Monetary Policies

Introduction

In today’s society, the living standard is often dependent on the country’s ability to produce goods and services. Technological advancements, physical capital, natural resources, and human capital are some of the major factors affecting this ability. However, the growth rate of an economy is also significantly influenced by the government by employing numerous policies. These regulations not only help to grow the economy but also have a great impact on day-to-day activities. While some of the results might be slow to achieve, the government can apply various discretionary and monetary policies as they can help expand or shrink the economy when necessary.

Discussion

Discretional fiscal policies involve changes in government taxes or expenditures with the aim of either expanding or shrinking the economic growth rate of a country as needed. This type of policy can be executed in two major ways; an expansionary or contractionary fiscal policy. While contractionary fiscal policy focuses on slowing down economic growth, expansionary fiscal policies involve enhancing the growth of a country’s economy (Yadav, 2021). For instance, the government can utilize discretionary fiscal spending by implementing a policy to increase government spending and cut down taxes. Such a policy would be most significant during a recession, whereby the government experiences a great decline in economic performance for a long period.

Increasing government spending and reducing taxes can be beneficial in various ways. For instance, during a recession, people experience high unemployment and consumer spending which as a result leads to a contraction in the GDP of the country. Therefore, when the government increases its spending via contractors or directly through public work initiatives, it can create more jobs. Consequently, this increases consumer spending, thus creating demand and increasing economic growth. (Chatziapostolou, 2019). Similarly, reducing taxes increases consumer spending by putting more into individuals’ pockets. Combining the two strategies into a single policy accelerates the rate of recovering from a recession by promoting economic growth.

While it is true that such discretionary fiscal spending can help maintain an economy, the Federal Reserve can also use monetary policies to lower the need for discretionary policies. when a country experiences a high inflation rate, this might be an indicator of an impending recession. Therefore, to minimize the possibility of requiring discretionary fiscal spending to curb the recession, the central bank can employ its restrictive monetary policies to combat inflation. Restrictive monetary policies work by restricting liquidity (Diaz-Roldan et al., 2021). For instance, the Federal Reserve can increase the interest rate to make loans more expensive. As a result, the cost of mortgages and credit cards rises, thus, less money is lent out as credit, reducing the money supply within an economy. Through this, the Federal Reserve reduces the high consumer spending and slows the demand, thus cooling inflation and maintaining a healthy economic growth rate.

Conclusion

In summation, an extremely high or low economic growth of a nation can be hazardous. Therefore, in either case, the government can implement policies to enhance or limit an economic growth rate. During a recession, the federal government can implement a discretional fiscal policy to reduce taxes and increase government spending, to promote consumer spending and demand, thus improving economic growth. However, before the recession, a government may experience high inflation which can be resolved through restrictive monetary policies to lower the need for discretionary policies. This works by reducing unhealthy consumer spending causing outrageous demand rates by making loans and mortgages more expensive.

References

Chatziapostolou, T. (2019). Interpreting Keynes. A literature review of Keynes interpretations. Effects of Fiscal Policy in Monetary Union. Web.

Diaz-Roldan, C., Prats, M. A., & Ramos-Herrera, M. D. (2021). Redefining monetary policy rules: A threshold approach. PLOS ONE, 16(5), e0252316. Web.

Yadav, S. (2021). “Perspectives fiscal policy as a stabilization tool: Discretionary and non-discretionary policies“. Economic Affairs, 66(2). Web.