Policies towards Achieving Macroeconomic Stability Term Paper

Policies towards Achieving Macroeconomic Stability - Term Paper Example john Maynard Keynes set a good underpinning for government economic decision that has since then be improved by the post-Keynesian economists, through both support and critic of Keynes ideas. Its on the basis of these foundations that the government sets policies aimed at attaining huge run macro-economic policies. Keynesians approach towards stability In establishing a long term s macroeconomic stability, it deems incumbent to first understand what causes instability in the economy. Both monetarist and Keynesian economist agree that the world at times suffers from macroeconomic instability as shown by great recessions and booms. However the two economic thoughts disagree on the cause and and then advocate for different approaches towards stability. Keynes study was based on aggregate command and argued that the changes in the components of demand altered the equilibrium (Beetsma 2004). To the Keynesian econ omists aggregate demand is identical to take levels that base be measured in terms of the Gross Domestic product (GDP). The components of demand are, consumption, investment, export prodigality and government expenditure modeled as (GDP =C + I+ X + G= AD). Keynesian political economy agreed that these demand components always fluctuate and thus the GDP can never be stable. This create the main critic of self-adjusting mechanism as brought about the classical economists, with Keynesian economists arguing that investment was influenced by marginal efficiency of majuscule in addition to interest rates. Thus some savings are not invested as some individuals hoard cash balances if they speculate a rise in capital returns. An opposite cause of instability as observed by the Keynesian economists are fluctuations of the show side, where output levels can be altered by artificial supply restrictions, wars, changes in cost of production both which reduce the output levels. All the alt erations of the equilibrium call for correction measures, with which Keynesian economist suggest the resister adjustment of either the government expenditure or consumption component. They thus advocate for discretionary monetary policy where government expenditure is adjusted or alteration of taxes to reduce or increase boilersuit consumption levels. The Keynesian economists argue that money velocity is unstable and unpredictable in nature and thus disregard monetary policies effectiveness in adjusting in equalizing aggregate demand changes. Moreover, due to frequently changing components of demand Keynesian economists contempt annual budget adjustments and advocate for discretionary fiscal policies that instantly storm recessions and inflation despite causing surplus or deficit budget. In times of economic recession, when supply is more than demand hence causing reduction in commodity prices, demand has to be created. This is achieved by either reducing taxes or increasing gov ernment expenditure. Taxes are seen to reduce disposable income, readily operational for consumption. A reduction in taxes increases disposable income and hence increases aggregate consumption. Government consumption on the other hand creates demand for the excess supply. In times of inflation the opposite is applied, that is increased taxes to reduce disposa