During our class on Aggregate Demand (AD) and the IS-LM curves, we talked about using both Fiscal and Monetary Policies to achieve a certain goal. For example, raising taxes to reduce a budget deficit would lead to an inward shift in the IS curve and thus reducing both output and the interest rate. To maintain output, the Central bank needs to increase Money Supply to the point that output would remain at its original level (note we also talked about how difficult it would be for the CB to know exactly how much money to pump into the economy). Below is a piece by Christina Romer and a report by the IMF that deal with a debate that’s currently going on, whether now is the time for Western governments to take action to reduce their budget deficits. There are two sides, the first argues that now is the time for action to be taken before it’s too late and the second, that now is not the time, that economies are still fragile and austerity measures could to a double dip recession. The two links here are in favour of the latter, i will try and get a link to at least one article that is in favour of the former.
This is a very interesting point. Am in support of Christiana's view. The US economy and other major economies are not doing bad. The main problem now is to encourage spending and how can that be done? This is where Government intervention comes in i.e printing more money and, if necessary, spending heavily on public works — to fight unemployment during such. This is what the US government is going for and most EU are doing the opposite.I was listening to BBC this morning,it was reported that the Germany economy is doing pretty well but it's not a people driven economy but thanks to its export to China. According to the citizen,little is being done to encourage spending and for that being the case people are saving and consuming less and I believe soon austerity measures will follow. But my fear with this government spending is that it will widen the deficit gap which is a concern.
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