Business Cycle Fluctuations Monetary - Fiscal Policy & How it Work

Question: What would happen if no one tried to manage the business cycle? What role do you see for the Executive Branch of the U.S. government in managing the business cycle? How does fiscal policy work? What are its limitations? How does monetary policy work? Who is responsible for setting and implementing monetary policy? Answer: Business cycle is the fluctuations in the economic activity and the GDP growth rate. If there is no one to manage the business cycles then it would be difficult for economy to maintain stability in prices and growth due to which inflation will be uncontrollable. Investment will also be difficult. The Executive Branch of the U.S. government is responsible for managing the fiscal policies of the government. It manages the business cycle by using the fiscal policies of the economy. Fiscal policies are the taxes and the government expenditure policies. There are mainly twp types of fiscal policies that the government uses to stabilize the economy and control the inflation and the unemployment rate. There are mainly two types of fiscal policies expansionary and contractionary (Burda Wyplosz, 2012). Expansionary policies are used to expand the economy and increase the money supply to grow the economy while the contractionary policies are used to contract the economy by controlling the mon ey supply in the economy. The two main tools of fiscal policies are tax revenue and government expenditure. The main limitation of fiscal policies is that it could have an inverse impact on economy. For example government spending instead of stimulating the economy can reduce the demand due to market failure. Monetary policies are the policies used to control the economy by controlling the money supply in the economy. The main aim of monetary policy is to control inflation, unemployment rate and boost the economic growth. The Central bank of the economy is responsible for implementing the monetary policy such as Reserve banks in case of Australia and India (Mankiw, 2014). Money is a medium of exchange used to purchase goods and service in the form of coins and banknotes. The four main functions of money are that money acts as a medium of exchange, measure of value, standard of deferred payment and store of value. Since money can be stored for a long period of time without any decay it is also considered as store of value and unit of account. Money supply can be measured using various standards and there are mainly three different measures that include M1 that consists of coins and currency. The second measure is M2 that includes M1 plus the small savings account and the third measure is M3 that include M2 plus large time deposits that includes the financial instrument (Sardoni, 2015).The main primary function of money is that it can be used as a medium of exchange in the sense that money can be exchanged for goods and services. Market liquidity is the selling and purchase of assets without causing any drastic changes in the assets price. Federal Reser ve System is the Central Bank of United States and is greatly responsible for monitoring the economic activities of the economy. It is also responsible for creating liquidity in the market. It basically uses quantitative liquidity requirements to control the money market. The Central bank of the economy is responsible for controlling the fiscal as well as monetary policy of the country to control its macroeconomic factors (Ingham, 2013). References Burda, M., Wyplosz, C. (2012).Macroeconomics: a European text. Oxford university press. Ingham, G. (2013).The nature of money. John Wiley Sons. Mankiw, N. G. R. E. G. O. R. Y. (2014).Principles of macroeconomics. Cengage Learning. Sardoni, C. (2015).The functions of money and the demand for liquidity(No. 3/15).